ANSWERS to “TEST YOUR KNOWLEDGE”

Question 1.

Answer 4 – All of the above

 Question 2.

TRUE – refer to RG 175.104

Question 3. 

Answer 4 – A communication tool that sets out and explains the advice (RG90.17)

Question 4.

FALSE refer to RG 175.218

 Question 5.

TRUE – refer to RG 175.378

Question 6.

Answer 3 – Scaled advice can be simpler but CANNOT be of lower quality where the subject matter is not complex (RG244.74 – RG244.76 and RG175.412 – RG175.416)

Question 7.

FALSE – refer to RG 175.339

Question 8.

TRUE – refer to Financial Planners and Advisers Code of Ethics 2019 para 34

 Question 9.

Answer 2 – you considered at least one aspect of the client’s relevant circumstances (RG175.41 – RG175.50)

 Question 10.

TRUE – refer to Standard 3 paragraph 38 of the Financial Planners and Advisers Code of Ethics 2019

 Question 11.

Answer 3 – Provided that the advertisement also states that the client should consider whether the financial product is appropriate for them, the advertisement does not need to contain the s949A warning (RG175.59)

Question 12.

FALSE – there are not two sets of rules (RG 175.414)

Question 13.

Answer 4 – Information CAN BE incorporated by reference into the SoA provided that the document containing the information has already been given to the client and the SOA states that a copy of the information may be obtained from the providing entity on request, at no charge (s952(b) & RG175.180)

 Question 14.

Answers

Commentary:

The recommendation to set up an SMSF to a client with no interest or expertise in investment means that the client will always need the assistance of the advice provider. This creates ongoing remuneration for the advice provider and some of the advice provider’s related parties at a level of service that exceeds the simple solution the client was seeking. The client’s interests have not been prioritised when giving the advice.

1. Has the adviser acted in the best interests of the client?

No – In this situation, the advice provider has not complied with the best interests duty (s961B) and has breached s961J (i.e. conflict between client’s interests and those of provider, licensee, authorised representative or associates) because the advice provider has given priority to maximising adviser remuneration over the interests of the client.  Refer to RG175.403 (conflicts priority rule)

Also refer to RG175.365.  The advice is not fit for purpose and given the client’s relevant circumstances, the clients are unlikely to be in a better position if they follow the advice

2. Which of the seven (7) elements of the safe harbour (s961B) has the adviser failed to satisfy?

The adviser did not conduct reasonable product investigations.  He did not look past the SMSF structure s961B(2)(e).  The adviser’s judgment in advising the client was not based on the client’s relevant circumstances.  His judgment was skewed towards a SMSF structure which exposed the clients to a lot of unwanted liability in order to maximise adviser income s961B(2)(f).  The adviser failed to take any other step to ensure he acted in the best interests of the client s961B(2)(g).

3. In regard to the Financial Planners and Advisers Code of Ethics 2019, in what way has the adviser failed to demonstrate realise or promote the values of ‘trustworthiness’ and ‘fairness’?

Trustworthiness – the adviser has not acted in good faith and his unethical conduct has broken the client’s trust.

Fairness – the adviser did not bring professional objectivity to the task of engaging with clients professionally and particularly when he recommended a financial product that doesn’t suit their needs.

4. How has the adviser breached Standard 2 of the Financial Planners and Advisers Code of Ethics 2019?

The advice given and the products and services recommend by the adviser are not appropriate to meet the client’s objectives, financial situation and needs, taking into account the client’s broader, long-term interests and likely future circumstances.

The adviser has not acted in the client’s best interests because the advice given and the products and services recommended were not appropriate to  the client’s objectives, financial situation and needs, taking into account the client’s broader, long-term interests and likely future circumstances. The decisions and actions of the adviser may also fail the Standard 2 best interests test – Will the advice and recommendations improve the client’s financial well-being?  (refer to Para 29 Explanatory Statement)

Whilst the adviser should have taken into account the client’s express wishes, these do not override the adviser’s duty to give advice that is in the client’s best interests (refer to Para 36 Explanatory Statement)

5. How has the adviser breached Standard 5 of the Financial Planners and Advisers Code of Ethics 2019?

The adviser does not have reasonable grounds to be satisfied that the client understands the advice and recommendations given; understands the benefits of the recommended products; and costs and risks involved in acquiring, holding and disposing of the recommended SMSF; and how the adviser recommended they be managed (refer to Para 46 Explanatory Statement)

6. How has the adviser breached Standard 7 of the Financial Planners and Advisers Code of Ethics 2019?

The fees and charges payable to the adviser and his principal are not fair and reasonable, particularly the self-interest creation of an ongoing fee regime for the clients.  It does not represent value for money for the clients, considering the much cheaper super fund alternatives.  The adviser has not been fair to the clients. (refer to Para 55 Explanatory Statement)

7. How has the adviser breached Standard 9 of the Financial Planners and Advisers Code of Ethics 2019?

Standard 9 requires that

  • all financial product advice, and all financial products, offered to a client be offered in good faith (refer to Para 58 Explanatory Statement)
  • all financial product advice, and all financial products, be offered “with competence” (refer to Para 59 Explanatory Statement)
  • reflecting current law, financial product advice given, and financial products recommended, not be misleading or deceptive (refer to Para 60 Explanatory Statement)

Question 15.

1. Standard 6

2. (a) You did not consider the potential care needs for the client or one of the client’s family members; in this case Bob.  This standard requires that you consider Bob’s future increasing care needs as his dementia worsens; and the possibility that he may need to enter full time care; and  (b) You did not consider whether your investment recommendations should be limited to “ethical” or “responsible” investments

3. You probably haven’t satisfied the s961B safe harbour.  It is hard to argue that Bob’s dementia doesn’t form part of Mary & Bob’s relevant circumstances (s961B (2) (b) (ii)). Also read ‘Scope of the advice’ RG 175.282 – RG175.284.

In addition s961B (2) (g) requires that you must take any other step that, at the time the advice is provided, would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.

In terms of your failure to consider whether your product recommendations should be limited to “ethical” or “responsible” investments, it seems that the Code of Ethics automatically includes this requirement if recommending investment, unless you specifically raise it with the clients and scope it out of your advice if appropriate.

Question 16.

Standard 2 paragraph 35 states that “you must treat all clients fairly, as between themselves. You should provide professional services to all clients, managing your business so that each client has a fair share of your attention, skills and time.”

Question 17.

Answer 4 – RG 175.255 “We are more likely to take the view that processes for complying with the best interests duty are not effective, and that the best interests duty in s961B(1) is not being complied with, if an advice model typically leads to a one-size-fits-all outcome.”