Compliance: Theory and Practice in the Financial Services Industry

12E. Financial Planning

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   Licensing and Disclosure Requirements
   Training Requirements
   The Financial Planning Association
   General Compliance Concerns


Licensing and Disclosure Requirements

•     Financial planners offer financial product advice and often arrange dealings in financial products and therefore need a financial services licence authorising them to provide that service or to be an authorised representative of such a licensee.
•     If they deal with retail clients (and most will), they need:
  •     Financial Services Guide
  •     Statement of Advice for any advice given
  •     Product Disclosure Statement for any products recommended
  •     To act in the best interests of the client
  •     To avoid conflicted remuneration and comply with ongoing fee requirements
  •     To give warning if giving personal advice based on incomplete or inaccurate information or if giving general advice
  •     Dispute resolution systems
  •     Compensation arrangements
See Newman v Financial Wisdom Limited [2004] VSC 216

We covered these issues in lecture 8.

The level of enquiry required for a financial planner to have a reasonable basis for advice and to comply with their duty to act with reasonable professional care and skill was considered in Newman v Financial Wisdom Limited. In that case the Victorian Supreme Court accepted (at paragraphs 168 -175) the testimony of an expert financial planner of the standards expected of a financial planner under the now repealed s945A (the former requirement for an adviser to make reasonable enquiries and to have a reasonable basis for any personal financial advice they give) that:


"... investment advisers [can] either carry out research and analyse investment products themselves or use research and analysis generated from external sources. The extent of the research and the analysis which it would be reasonable to expect the adviser to do [depends] on the nature of the product which [forms] the basis of the particular recommendation and the needs of the client being advised. [Advisers] often [rely] on information being supplied by external research organisations, in which case, the adviser should evaluate the overall quality and effectiveness of the analyses so provided so as to ensure that reliance placed on any such information [is] reasonable in all the circumstances. For the purpose of advising a client, the adviser should take into account general economic and other information in relation to markets, industries and securities so as to be in a position to make judgments about future income and growth expectations and risk factors associated with particular securities. An adviser should provide written reports to the client about recommended securities so that the client can understand the basis on which those securities are recommended. The reports should cover such matters as risks associated with the issuer of the security, risks associated with the product, market and economic risks, capital and income prospects and so on.


[A] financial adviser should [conduct] a detailed interview in which data [is] collected on the client's present financial position and their objectives [are] identified and agreed. The financial adviser should [prepare] a written financial plan so as to position the client to achieve an efficient use of their resources [which] also [advises] on immediate and future strategies to achieve the client's objectives, [records] the advice given and the reasons for the advice, [discloses] any interest of the adviser and [also refers] to the research undertaken on any recommended investment. Before recommending an investment, the adviser should either carry out research and analyse the investment or use research and analysis generated from external sources. The extent of the research and analysis [depends] on the nature of the investment product and the needs of the client. The adviser should be able to provide and should normally provide to the client sufficient written information about the investments recommended so that the basis on which they [are] considered appropriate for the client [can] be understood. Both risk factors and return expectations should be addressed, including risks associated with the issuer, risks associated with the product, market and economic risks and capital and income prospects.


[For conservative investors], ... a prudent financial planner would [advise] a mix of investments to provide some capital growth, low volatility, low risk and some income - varied according to the needs of the particular client. ...


[A] reasonable and prudent financial adviser would advise a client of the degree of risk involved in a particular investment, irrespective of the client's risk profile or the client's wish to obtain an immediate tax deduction and if, because of the nature of the investment, the financial adviser was not prepared to recommend it but the client insisted on going ahead, the adviser would have the client sign a written indemnity.

     [There is] room for a prudent investment adviser to recommend speculative investments if the client so requested, provided that the circumstances of the client [are] such that any loss of capital involved [will] have no material effect on their achieving their goals and objectives."

Note that the former Labor Government tabled a Bill to introduce a new s923C to the Corporations Act that, if passed, would have restricted the use of the terms 'financial adviser' and 'financial planner' in a similar manner to the way in which s923B restricts the use of the terms stockbroker, futures broker and insurance broker: see the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013. That Bill lapsed with the calling of the election in 2013. Its future is unclear under a Liberal government.

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Training Requirements

RG 146 - Required Training
An adviser providing financial planning advice that requires a detailed client needs analysis should undertake approved training courses which address the elements set out under ASIC's requirements for:
•     generic knowledge;
•     specialist knowledge under the financial planning and superannuation categories; and
•     appropriate skills.
They also need to complete courses covering insurance, managed investments, securities markets, FHSAs, margin lending facilities and regulated emissions units, if they advise on these products.

See RG 146 Table 4.

Click here for a copy of ASIC Regulatory Guide 146 - Licensing: Training of financial product advisers.

RG 146 - Generic Knowledge
Generic knowledge =
•     the economic environment;
•     operation of financial markets;
•     financial products.

See RG 146 Table A1.

RG 146 - Specialist Knowledge
Specialist knowledge =
•     theories of investment, portfolio management and management of investment and risk;
•     advisory functions;
•     legal environment - disclosure and compliance;
•     taxation;
•     estate planning.

See RG 146 Table A2.1. RG 146 notes that the financial planning process may require knowledge of specialist categories (eg managed investments, superannuation, insurance and FHSAs).

RG 146 - Skill Requirements
Skill requirements =
•     establish relationship with client;
•     identify client objectives, needs and financial situation;
•     analyse client objectives, needs, financial situation and risk profile;
•     develop appropriate strategies and solutions;
•     present appropriate strategies and solutions to the client;
•     negotiate financial plan/policy/transaction with the client;
•     co-ordinate implementation of agreed plan/policy/transaction;
•     complete and maintain necessary documentation;
•     provide ongoing service (optional at discretion of client).

See RG 146 Table B.

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The Financial Planning Association

What is the FPA?
•     The peak professional organisation for the financial planning industry in Australia - a company limited by guarantee representing approximately 12,000 individuals and businesses.
•     Constitution empowers FPA to adopt disciplinary regulations in relation to complaints and breaches of the constitution and the rules of professional conduct.
•     Constitution empowers FPA to conduct "compliance reviews" and to request the supply of material relevant to ensuring that a member is complying with the constitution, disciplinary regulations, code of ethics, rules of professional conduct, the Corporations Act and Regulations and "all relevant statutes and the law generally".

 Click here for a copy of the FPA Disciplinary Regulations.

FPA Code of Ethics
1.    Place the client’s interests first
2.    Provide professional services with integrity
3.    Provide professional services objectively
4.    Be fair and reasonable in all professional relationships. Disclose and manage conflicts of interest
5.    Act in a manner that demonstrates exemplary professional conduct
6.    Maintain the abilities, skills and knowledge necessary to provide professional services competently
7.    Protect the confidentiality of all client information
8.    Provide professional services diligently

Click here for a copy of the FPA Code of Professional Practice, which contains the Code of Ethics, as well as 7 practice standards and rules of professional conduct.

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General Compliance Concerns

General Compliance Concerns
•     Obligation to act in the client's best interests/conflicts/fiduciary duties
•     Statements/records of advice (including evidence of proper enquiries and reasonable basis for advice)
•     Trust account rules
•     Discretionary trading authorities and powers of attorney (including procedures/checks to guard against adviser abuse and fraud)
•     Obligation to avoid conflicted remuneration and comply with ongoing fee requirements

The poor compliance culture of, and generally poor quality advice given by, some sections of the financial planning industry in Australia was laid bare by the aftermath of the GFC and has been the subject of much commentary. The scandal at Commonwealth Financial Planning, for example, occupies 5 chapters of the 2014 Final Report of the Senate Economics Committee on the Performance of the Australian Securities and Investments Commission.

In relation to fiduciary duties, recall the quote from Brennan J in Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 370, 385 we looked at in lecture 9:


"Whenever a ... person who holds himself out as having expertise in advising on investments is approached for advice on investments and undertakes to give it, in giving that advice the adviser stands in a fiduciary relationship to the person whom he advises. The adviser cannot assume a position where his self-interest might conflict with the honest and impartial giving of advice ..."

By way of historical background, some of the remuneration arrangements that use to be prevalent in the financial planning industry prior to the introduction of CA Part 7.7A certainly would have tested the resolve of financial planners to put the honest and impartial giving of advice ahead of their self-interest!

In June 2004, ASIC released a research report (REP 30) on Disclosure of Soft Dollar Benefits  in the financial planning industry. It defined soft dollar benefits as benefits other than standard commission payments. The report revealed that a wide range of soft dollar benefits were being offered. Benefits to individual advisers included overseas trips, share options and cash bonuses for selling particular financial products. Benefits to financial planning firms included 'fee rebates', potentially worth millions of dollars each year to the larger firms. The report contained examples of both good and poor practice and provided guidance about effective disclosure.

IFSA (now FSC) and the FPA subsequently released their Industry Code of Practice on Alternative Forms of Remuneration in the Wealth Management Industry in July 2004 and Industry Guide on Rebates & Related Payments in the Wealth Management Industry in November 2004 as part of a broader initiative by the two bodies to improve payment and remuneration practices in the industry.

The FPA also released guidance to FPA Members on principles to manage conflicts of interest in June 2006. Principle 1 required the cost of financial planning advice to be separately identified as a financial planning advice fee in the Statements of Advice provided by FPA members to clients, and the total fees paid for ongoing advice to be disclosed to clients on a regular basis. Principle 3 sought to remove any bias in payment methods to advisers from licensees and placed responsibility with the licensee to determine that remuneration arrangements are not biased against the client. Principle 4 sought to ensure that those FPA Principal members which were part of a group that also provided financial services products or platform services had in place arrangements which enable the interests of clients to be considered independently of wider group interests.

Notwithstanding these improvements in industry standards, ASIC was sufficiently concerned by the conflicts caused by commission arrangements that, in its submission to the Parliamentary Joint Committee on Corporations and Financial Services Inquiry in 2009 into the Storm Financial, Opes Prime and other similar collapses, it recommended that financial planners should be banned from being remunerated in any way that might distort the quality of their advice. ASIC said that this should include banning up-front commissions, trail commissions, soft-dollar incentives, volume bonuses, rewards for achieving sales targets and fees based on a percentage of funds under advice - effectively limiting planners to charging on a fee for service basis. It said (at 168-72):


"Commission payments can create real and potential conflicts of interest for advisers. They could encourage advisers to sell products rather than give strategic advice (e.g. advice to the client that they should pay off their mortgage), even if this advice is in the best interests of the client and low risk. Commissions also provide an incentive to recommend products that may be inappropriate but are linked to higher commissions. Higher commissions might be provided for selling higher-risk products, perhaps because other advisers are unwilling to sell these products due to the high risk (e.g. Westpoint).


Products that might be in the interests of the client but do not generate a high commission return (such as industry superannuation funds) might not be recommended to clients. Moreover, because many advice businesses are remunerated through product sales, the businesses need to continue to bring in new clients to invest in products. Further, because commissions are paid irrespective of whether or not services are provided there is little incentive to service existing clients.


Remuneration based on the amount of funds under advice can also create conflicts of interest. Advisers who are remunerated by reference to funds under advice have an interest in selling investment products to their clients and encouraging their clients to borrow to invest.


There is evidence that these conflicts of interest can affect the quality of advice. ASIC’s 2006 Shadow Shopping exercise suggested that unreasonable advice was more common where the adviser stood to get higher remuneration if the recommendation was followed.


Storm may be an example of the potential impact on clients of failure to manage conflicts of interest created by commissions and remuneration based on funds under advice. While our investigations are continuing, we understand that Storm advisers may have counted loans as funds under advice and took a percentage of funds under advice as remuneration, creating a possible incentive to recommend clients take out loans or increase the size of existing loans."

The Government accepted ASIC's recommendation and introduced CA Part 7.7A to ban financial services businesses from paying any commissions or payments relating to volume or sales targets for the distribution of, or provision of advice about, retail financial products.

For an example of conflicted remuneration, see ASIC Media Release 14-124MR, where ASIC banned a former UBS financial planner for 5 years for misleading and deceptive conduct. The planner had entered into an arrangement with Astra Resources PLC under which he stood to receive 900,000 Astra shares if he caused UBS clients to acquire Astra shares. Several UBS clients invested a total of $1,000,000 in Astra on his recommendation and, as a result, he received (through a nominee) the 900,000 Astra shares. He did not disclose the arrangement or the receipt of the Astra shares to his employers or his clients.

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