ASIC consults financial services licensees on scaling advice

The Australian Securities and Investments Commission (ASIC) thinks that Australians increasingly prefer to receive financial advice in the form of piece-by-piece (or 'scaled') advice, as opposed to all-in-one, comprehensive advice.

In response, ASIC wants to encourage advisers to scale advice where appropriate, in a way that complies with the adviser's legal obligations.

To start this process, ASIC has published Consultation Paper 164 entitled 'Additional advice on how to scale advice' (the Paper). The Paper:

  • contains a proposed reshaping of ASIC's guidance on giving advice; and
  • includes examples of how to scale advice for retail clients in relation to a range of topics, including superannuation pension products, the nomination of beneficiaries and retirement planning.
 

What does the Paper mean for me?

If you are a financial services licensee or an authorised representative, then you may give a retail client factual information, general advice or personal advice — as long as you make it clear what kind of advice you are providing.

ASIC wants to encourage advisers, where appropriate, to provide advice on single topics (rather than holistic advice on all topics). The guidance and examples proposed in the Paper seek to educate advisers on the services they are offering and the obligations they have about providing advice.

If you are in any doubt as to the nature of advice you may be providing to a client, then the Paper will help you distinguish between factual information, general advice and personal advice — especially in the context of superannuation. The examples contained in the Paper may provide a useful template for how you interact with clients while complying with your legal obligations.

Obligations under the Corporations Act

One of the key obligations for financial advisers in the Corporations Act 2001 (Cth) (Corporations Act) requires a licensee (or authorised representative) to have a reasonable basis for giving personal advice to a retail client. This is known as the 'suitability rule' or 'know your client' rule. 1 The section states that an adviser must only provide advice if:

  • (know your client) they inquired about the client's personal circumstances relevant to the advice; and
  • (know your product) in light of the client's personal circumstances, they considered and investigated the subject matter of the advice in a way that was reasonable in the circumstances; and
  • (ensure the advice is appropriate) in light of the adviser's consideration and investigation, they have made sure the advice is appropriate.

Similar obligations apply to giving general advice.2 Also, advisers are required to act honestly, efficiently and fairly at all times.

Existing ASIC guidance on giving advice

ASIC Regulatory Guide 200 entitled 'Advice to super fund members' (RG 200) currently provides guidance on how to give personal advice3 and general information.4 It outlines the differences between the concepts of factual information, general advice and personal advice, and provides examples of each:

Factual information General advice Personal Advice
Objectively ascertainable information whose truth or accuracy cannot be reasonably questioned Advice prepared without taking into account the client's objectives, financial situations or needs Advice that is given or directed to a client in circumstances where the provider of the advice has considered one or more of the client's objectives, financial situation and needs

What is the aim of the Paper?

The ultimate aim of the Paper is to implement ASIC's proposal to replace RG 200 with a new regulatory guide that builds on RG 200 by expanding:

  • its content and providing a greater number of examples of advice on a broader range of topics; and
  • its application to all financial services licensees, including superannuation trustees, financial planners and accountants.

ASIC wants to clarify that an adviser may give a retail client factual information, general advice or personal advice, as long as the client is aware what kind of service is being offered by the adviser. ASIC wants to highlight that different obligations attach to each type of information or advice.

The perceived need for a new regulatory guide arises from ASIC Report 224 entitled 'Access to Financial Advice in Australia', available here which, among other things, identified that one-third of Australians expressed a preference for 'scaled advice' as opposed to 'holistic advice':

Piece-by-piece or scaled advice Holistic advice on all topics
Advice about one area of a client's needs (e.g. insurance) or a range of issues Advice on all aspects of a client's financial circumstances in a full financial plan

What does the Paper do?

The Paper is a consultation paper, which will form the basis for a new regulatory guide. It:

  • updates guidance for licensees and authorised representatives about how to give compliant, scaled advice;
  • gives examples of providing factual information, general advice and personal advice on non-superannuation topics;
  • gives examples of how to provide factual information, general advice and personal advice on five new superannuation topics:
    • intra-pension issues;
    • transition to retirement;
    • nomination of beneficiaries;
    • superannuation and Centrelink payments; and
    • single issue advice on retirement planning;
  • discusses ASIC's intention to revoke Class Order 09/210, which provides conditional relief for some superannuation fund trustees from section 945A of the Corporations Act (this class order does not apply to trustees of self-managed superannuation funds); and
  • calls for industry submissions by 8 September 2011.

What new guidance is there for AFS trustees on how to scale advice?

ASIC wishes to build on the guidance contained in RG 200 by replacing it with a regulatory guide containing ASIC's existing guidance, together with:

  • a discussion of good practice arrangements for scaling advice; and
  • an expanded series of examples of factual information, general advice and personal advice for both non-superannuation and superannuation topics.

What are some examples of the guidance on scaled advice on non-superannuation topics?

The Paper contains examples of how to give factual information, general advice and personal advice on the following non-superannuation topics:

Topic Examples of information/advice
Basic deposit products and insurance
  • Factual information about how to voluntarily increase the basic excess on a motor vehicle insurance policy and the impact of doing so
  • General advice about in what circumstances the adviser would generally recommend that a person voluntarily increase the basic excess on a motor vehicle insurance policy
  • Personal advice about whether the retail client specifically should voluntarily increase the basic excess on a motor vehicle insurance policy
Shares and other listed financial products
  • Factual information about current news and developments for a listed financial product
  • General advice about what circumstances the adviser would generally recommend that a person purchase the listed financial product
  • Personal advice about whether it is a suitable product for the retail client to purchase
How to invest an inheritance
  • Factual information about possible approaches to investing an inheritance
  • General advice about how the adviser would generally recommend that a person invest an inheritance
  • Personal advice about how the retail client specifically should invest the inheritance

For some of these examples, the Paper contains scenarios where factual information, general advice and personal advice is provided. These take the form of a conversation between an adviser and client.

What are some examples of the guidance on scaled advice on superannuation topics?

The Paper also contains examples of how to give factual information, general advice and personal advice on the following superannuation topics:

Topic Examples of information/advice
Intra-pension issues
  • Factual information about what factors will affect how long a pension will last
  • General advice about how account-based income streams work and the potential to exhaust a member's funds if expenditure is not kept in check
  • Personal advice about how long the pension would be likely to last for the member specifically
Transition to retirement
  • Factual information about how the rules on transition to retirement work
  • General advice about the circumstances in which the adviser would generally recommend that a person take up this option
  • Personal advice about whether it is a suitable option for the member specifically
Nomination of beneficiaries
  • Factual information about the actual process of nominating beneficiaries and how often the nomination needs to be updated to remain effective
  • General advice about methods of nominating beneficiaries
  • Personal advice about nominating beneficiaries in the member's specific circumstances
Superannuation and Centrelink payments
  • Factual information about how issues relating to a member's superannuation can affect their Centrelink payments
  • General advice about what the adviser would generally recommend in relation to a superannuation issue that may affect the member's Centrelink payments
  • Personal advice about what the adviser recommends that the member do in theirs specific circumstances (e.g. what decision would be most beneficial for the member in terms of their Centrelink payments)
Single issue advice on retirement planning
  • Factual information about paying a windfall into their mortgage versus into their superannuation
  • General advice about what the adviser would generally recommend in relation to paying a windfall into a mortgage versus into superannuation
  • Personal advice about what the adviser recommends that the member do in their specific circumstances

For all of these examples, the Paper contains scenarios where factual information, general advice and personal advice is provided. These take the form of a conversation between an adviser and client.

What happens next?

ASIC has requested submissions in response to the Paper before 8 September 2011. A phase two paper containing further examples is due to be released shortly after.

ASIC's current timetable indicates that the new regulatory guide will be published in November 2011, to be followed by a further consultation period if required.

It is also anticipated that the new regulatory guide will be updated in 2012 after financial advice reforms.

More information from Maddocks

For more information about your obligations when giving personal advice to retail clients, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Maddocks Corporate and Commercial Team.

More information from Cleardocs

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1 See section 945A of the Corporations Act.

2 See section 949A of the Corporations Act.

3 Under section 945A of the Corporations Act.

4 Under section 949A of the Corporations Act.