ADDITIONAL SET OF PRACTICE QUESTIONS (42)

Answers are on this page, below the question set

 Question 1

Insurance commissions are explicitly allowed by law and may be an acceptable form of remuneration for advice. In the context of a specific client situation, which of the following does an adviser need to do in relation to Standard 3 before acting for a client?

  1. Satisfy themselves that the advice and product recommendation is in the best interests of the client
  2. The commission received is fair and reasonable and represents value for the client and is fully understood by the client;
  3. The client understands benefits, costs and risks of the insurance advice; and the advice and fee structure are appropriate for the client
  4. A disinterested or unbiased person, in possession of all the facts, would reasonably conclude that the remuneration would not lead the adviser to prefer the interests of someone (including their own) over the client’s best interest.
  5. All of the above

 Question 2

Ted is a relevant provider who operates through a private company which is a Corporate Authorised Representative (CAR) of Ted’s AFS Licensee.  Ted is the company’s only adviser and he is the sole director of the company.  Ted’s remuneration is directly related to advice fees, insurance commissions and referral fees (received from a number other professionals to whom he refers clients). Ted’s Licensee pays this remuneration to Ted’s CAR each fortnight. Ted then draws a regular salary from his company (CAR).

In relation to Standard 7, are the following statements TRUE or FALSE?

  1. Referral fees received from the AFS Licensee via Ted’s company (CAR) can form part of Ted’s remuneration drawn from his company, provided that Ted demonstrates compliance with the Code in the same manner as advice fees and insurance commissions received. TRUE or FALSE
  2. Ted can receive the advice fees and insurance commissions but the referral fees received from the AFS Licensee via Ted’s company (CAR) cannot form part of Ted’s remuneration drawn from his company because relevant providers are banned from receiving referral fees; therefore Ted must cease the payments from his referral partners. TRUE or FALSE

 Question 3

In regard to the Financial Planners and Advisers Code of Ethics 2019, are the following statements TRUE or FALSE?

  • A relevant provider is bound by this compulsory code of ethics when providing personal advice and services to a wholesale client TRUE or FALSE
  • A relevant provider is bound by this compulsory code of ethics when providing general advice to a retail client TRUE or FALSE
  • A relevant provider is bound by this compulsory code of ethics when providing personal advice and services to a retail client TRUE or FALSE

 Question 4

Sandra is a financial adviser and relevant provider.  She has existing clients who she does not regularly contact where she continues to receive commission.  These clients are grandfathered as per the pre-FOFA requirements.

In relation to Sandra meeting Standard 4 and seeking consent from these clients after the introduction of the Code of Ethics on 1 January 2020, are the following statements TRUE or FALSE?

  1. Sandra will need to contact these clients as soon as practicable, to seek their signed consent post 1 January 2020 TRUE or FALSE
  2. Sandra will need to download the appropriate FASEA approved form to meet this Standard 4 requirement TRUE or FALSE
  3. Sandra may use an existing form to obtain signed consent from these clients for example, a Service Agreement, an Authority to Proceed with Advice TRUE or FALSE

 Question 5

In relation to the definition of financial products, services and financial product advice for the purpose of requiring a AFS licence or not, are the following statements TRUE or FALSE?

A financial product is a facility that allows a person to make a financial investment, manage a financial risk or make non-cash payments.  TRUE or FALSE

 Question 6

Generally, you are providing a financial service if you provide financial product advice or deal in a financial product, but not if you are providing traditional trustee company services TRUE or FALSE

 Question 7

Financial product advice is a recommendation or a statement of opinion, or a report of either of those things, if it is provided with the intention of influencing a person’s decision in relation to a financial product.

In determining whether a communication constitutes financial product advice, which of the following statements is NOT TRUE?

  1. It depends on the overall impression and circumstances of a communication
  2. Whether the communication is merely factual information
  3. Whether a decision on a particular financial product or class of financial product is made
  4. Whether the advice provider intends the communication to influence the person’s decision in relation to a financial product

Question 8

There are two types of financial product advice under the Corporations Act.  They are personal advice and general advice.  TRUE or FALSE?

Question 9

Personal advice is financial advice given or directed to a person (including by electronic means) in circumstances where the advice provider has considered one or more of the person’s objectives, financial situation and needs; or a reasonable person might expect the provider to have considered one or more of those matters.  TRUE or FALSE

Question 10

A communication might be exempt from being financial product advice if it is advice given by a lawyer or tax agent (in the course of their ordinary activities) or is a quote relating to the cost of a financial product or the rate of return on a financial product.  TRUE or FALSE

 Question 11

Is the following statement TRUE or FALSE?

“You can give factual information and general advice by telephone, email, internet, video conferencing or face-to-face, but personal advice must be provided face to face only and followed up within 5 days in writing with the appropriate disclosure document required by the Corporations Act.” TRUE or FALSE

Question 12

In relation to general advice, are the following statements TRUE or FALSE?

  1. When you are giving general advice to a client you should give a general advice warning TRUE or FALSE
  2. In s949A(2), the Corporations Act sets out the wording to be used in a general advice warning. The Act also requires that this exact wording must be used when giving general advice.  TRUE or FALSE
  3. You should take reasonable steps to ensure that the client understands that you have not taken into account their objectives, financial situation or needs in giving the general advice. TRUE or FALSE
  4. When giving a general advice warning orally, the warning can be reduced to, “The advice is general advice; and the advice may not be appropriate for you (the client).” TRUE or FALSE

Question 13

Which of the following statements is NOT a statutory inclusion (Corporations Act) in a written general advice warning to a retail client?

  1. The advice is not personal advice and a Statement of Advice will not be issued
  2. the advice has been prepared without taking account of the client’s objectives, financial situation or needs; and
  3. Because of that, the client should, before acting on the advice, consider the appropriateness of the advice, having regard to the client’s objectives, financial situation and needs; and
  4. If the advice relates to the acquisition, or possible acquisition, of a particular financial product—the client should obtain a Product Disclosure Statement (PDS) relating to the product and consider the Statement before making any decision about whether to acquire the product

Question 14

Is the following statement TRUE or FALSE?

“Failing to provide a general advice warning when one is required is a civil liability contravention” TRUE or FALSE

Question 15

Which of the following statements is the most correct?

  1. A general advice warning must be given to the client before the advice is provided and can be communicated by any effective means.
  2. A general advice warning can be given to the client after the advice is provided and must be communicated by the same means as the advice is provided.
  3. A general advice warning must be given to the client at the same time as the advice is provided and by the same means as the advice is provided.
  4. A general advice warning must be given to the client at the same time as the advice is provided and can be communicated by any effective means.

Question 16

  1. A stockbroker prepares periodic newsletters or research reports containing assessments of various financial products and sends them to their entire client list. Is this more likely to be factual information or general advice?
  2. An adviser sends different newsletters, research reports or marketing brochures to different segments of their client base, using personal information from the adviser’s database to decide who is to be included in each segment. Is this more likely to be factual information or general advice?

Question 17

The following statement is made by Emma, a financial planner, to her client William.  Is it factual information or general advice?

“In regard to the inheritance you have just mentioned, one option is to pay off debts such as a mortgage, personal loan, car loan or credit card debts. Paying off a loan will save interest, although you may incur exit fees and it may have taxation consequences if the loan is for investment purposes. There are a lot of investments to choose from—too many to cover now, but I can give you some information about some of the more common options. First-home saver accounts can be used by people who are saving to buy or build their first home.” FACTUAL or GENERAL

Question 18

In a subsequent call by client William to financial planner Emma in regards to the inheritance he received, the following statement is made by Emma.  Is it factual information or general advice?

“Yes, I’ll take you through the investments we generally recommend to our clients. Generally, for clients who receive an inheritance, I would recommend that they first pay off loans such as personal loans, car loans or credit cards. Reducing this debt will free up cash flow.  Before paying off any debt, I advise clients to consider whether early termination or legal fees apply.  FACTUAL or GENERAL

Question 19

A record of advice must be prepared as a written document and kept on the client’s file except where the corporations Act requires the document to be provided to the client TRUE or FALSE

Question 20

Sarah is an authorised representative of Australia Wide Financial Advisers, an AFS licensee. Sarah does not receive any commissions, volume-based payments, or other gifts or benefits.

Australia Wide Financial Advisers authorises two other representatives, Colin and Chris, to provide advice on its behalf. Australia Wide Financial Advisers receives commissions, and Colin and Chris also receive commissions.

  1. Can Sarah use the terms independentimpartial or unbiased? YES or NO
  2. Can Sarah use the words independently owned, non-aligned or non-institutionally owned? YES or NO
  3. Can Sarah use the words locally owned or privately owned? YES or NO

Question 21

Scenario

Mike and his wife Melanie are almost age pension age and want to retire very soon.  They have a home valued at $1.2M and because they were both self-employed in their own business, they only have $350,000 of super between them.

They seek advice from financial planner Mary in relation to downsizing their home and relocating; as well as her advice in relation to applying for the age pension.

During the initial interview with Mary, Melanie leaves the room.  While she is out, Mike tells Mary that he has a $100,000 Term Deposit that Melanie doesn’t know about.

Questions

  1. Which Standard should Mary be primarily thinking about before she responds to Mike’s admission?
  2. What should Mary say to Mike in response to his admission?
  1. In the context of the advice sought by Mike and Melanie, provide two (2) practical reasons why Mike needs to tell Mary about the $100,000 term deposit.

Additional Scenario

Mike and Melanie ask Mary if she could, for a fee, find an ideal (downsized) home for them if they gave her a full brief of their needs.

Questions

  1. Is the service requested by Mike and Melanie a financial product? YES or NO?
  2. Should Mary be providing this service as a financial planner? YES or NO?
  3. Which is the most applicable ethical value that Mary should be considering in this situation?
  4. Which is the most applicable ethical standard that Mary should be considering in this situation?
  5. If Mary refers Mike and Melanie to a licensed real estate agent, is Mary able to receive, with the client’s written consent, part of the commission received by the real estate agent on the sale of their house? YES or NO.
  6.  Which the most applicable ethical standard in this situation?

Question 22

Scenario

Wayne is a risk insurance adviser.  He is providing personal insurance advice to Lucy. He is providing scaled advice, where the subject matter is limited to switching Lucy’s Trustee-owned Life & TPD insurance policies in her superannuation account to non-superannuation self-owned Life & TPD policies.

Wayne undertakes a fact find interview with Lucy where he gathers her personal details and information relevant to her existing trustee-owned Life & TPD policies.  He undertakes adequate product research, and then takes the time to carefully explain the proposed new policies to Lucy, as well as the differences between old policies and new.  An initial quote from the proposed insurance provider (before underwriting) indicates that Lucy can have the benefit of a higher amount of Life & TPD insurance for the same premium cost as she is currently paying in her superannuation account.

Based on information gathered as described above, Wayne’s final recommendation to Lucy is $500,000 life & TPD insurance and $100,000 trauma insurance.

Questions

  1. What is the problem with Wayne’s advice?
  2. What does Wayne need to do correct this situation?
  3. Which Value has Wayne most likely failed to demonstrate, realise and promote?
  4. Which Standard has Wayne most likely breached?

Question 23

Scenario

Matt is a self-employed electrician.  He works 6 days a week and runs a successful business.  On Saturdays, he does cash jobs at a discount for friends, family and some elderly customers who otherwise couldn’t afford his service.

Matt comes to see you as a new client.  When you are gathering information on his income, he mentions the cash jobs and the fact that he keeps two sets of books.

Questions

  1. You should refer Matt to an accountant? TRUE or FALSE
  2. Should you give Matt advice on cash flow management? TRUE or FALSE
  3. You suspect that Matt is not paying income tax on the money he receives from his cash jobs. What should you do?

 Additional Scenario

Matt asks you if you, as a tax financial adviser, would prepare his tax return as part of your fee-for-service package.

Questions

  1. Are you permitted to provide this service? YES or NO
  2. Matt asks you what a tax financial adviser is.

Your reply that “It is a tax agent service which excludes representations to the Commissioner of Taxation, provided by a financial services licensee or a representative of one, that is provided in the course of giving advice of the kind usually given by a financial services licensee or a representative of one, where that services relates to advising an entity about its obligations or entitlements that arise or could arise under a taxation law and (what)?  Complete the definition from the choices below.

  1. Where the entity requires more detailed information it should consult a tax agent
  2. The entity can reasonably expected to rely on the service for tax purposes
  3. It is part of a strategic discussion about an entity’s long-term financial objectives
  4. It consists of preparing a return or a statement in the nature of a return for the entity

Question 24

Scenario

Cathy is a single mother, 40 years of age, who is incapacitated.  Her only child is her teenage son, Angus who is 15 years of age and lives with her.  Cathy has a modest income and some investments. Her main priority is to take care of her teenage son and provide him with a good upbringing and education.

Cathy has been a client of financial planner Ronald for 3 years and she comes in to see Ronald every 6 months for a review.  Cathy is a balanced investor. Half of her investments are in superannuation and the other half ($25,000) is invested and diversified in a portfolio of managed funds.  Any withdrawals from the portfolio will incur an exit fee.

3 months after her last review, Cathy contacts Ronald to arrange an appointment.  Cathy arrives for the appointment with her new boyfriend, Craig.  She tells Ronald that Craig has a private property scheme that he has suggested she might like to invest in, and it promises high returns.  She wants to withdraw her $20,000 from her managed fund portfolio.

Questions

What are two disadvantages of Cathy changing from the managed fund portfolio to Craig’s proposed property scheme?

Question 25

Scenario

Jane is an experienced and competent financial planner.  She has a two-tier fee charging system based on the client’s ability to pay; where she charges high net worth clients a higher hourly rate for her advice services and charges low net worth clients a lower hourly rate.  She tells low net worth clients that their fees are being subsidised.

Questions

  1. Which value is applicable in this instance?
  2. Has Jane breached any of the Standards and if so, which one?

Question 26

Margaret a financial adviser is conducting a fact find interview with a new client Tom.  Tom has come to see Margaret seeking a comprehensive financial plan.  At the completion of the interview, Margaret realises that for a number of reasons, a less complex plan might be more beneficial for Tom at this time.

Consider each statement below in terms of TRUE or FALSE

  1. Only Tom can suggest revising the subject matter of the advice he originally sought TRUE or FALSE
  2. Only Margaret can revise the subject matter of the advice originally sought by Tom TRUE or FALSE
  3. Either Margaret or Tom can suggest limiting or revising the subject matter of advice originally sought by Tom TRUE or FALSE

Question 27

Bill is an authorised representative of Licensee, Good Advice Pty Ltd, whose licence conditions excludes the provision of advice on direct shares or other listed securities.

In his personal capacity, Bill is an enthusiastic stock market investor.  In the course of communicating retirement related advice sought by Owen, Bill also makes a personal recommendation to client Owen about an upcoming Initial Public Share Offering (IPO).  This recommendation is verbal and not contained in the SoA.  Bill discloses to Owen that he is acting outside his authority in relation to Good Advice Pty Ltd by making the share recommendation.  Owen relies on the advice and makes a share purchase.  The IPO is an immediate flop and Owen makes a complaint to Good Advice Pty Ltd.

Consider each statement below in terms of TRUE or FALSE

  1. The licensee Good Advice Pty Ltd is not liable for the actions of authorised representative Bill TRUE or FALSE
  2. The licensee Good Advice Pty Ltd is liable for the actions of authorised representative Bill if Bill failed to disclose to Owen that he was acting outside his authority TRUE or FALSE

Question 28

In order to ensure that a client is likely to be in a better position if that client follows the advice, an advice provider is required to give which type of personal advice?

  1. Good advice
  2. Perfect advice
  3. Ideal advice
  4. Appropriate advice

Question 29

A licensee receives a volume-based benefit from a product provider as the result of ‘Authorised Representative A’ recommending a financial product to one of her clients.

Consider each of the following scenarios and determine whether the statement associated with each is TRUE or FALSE.

Scenario 1 – the licensee passes the benefit on to ‘Authorised Representative A’.

It is unlikely to be conflicted remuneration if ‘Authorised Representative A’ promptly passes the entire benefit on to the client and the licensee expects that it will be passed on to the client.   TRUE or FALSE

Scenario 2 – the licensee doesn’t pass on the benefit and keeps it instead.

It is likely to be conflicted remuneration if the AFS licensee uses the benefit to pay for its operating expenses.  TRUE or FALSE

Scenario 3 – the licensee passes on a portion of the benefit to ‘Authorised Representative B’.

It is unlikely to be conflicted remuneration if the licensee passes on a portion of the benefit to an authorised representative to help pay for the operating expenses of ‘Authorised Representative B’ and that ‘Authorised Representative B’ does not pass on this benefit to ‘Authorised Representative A’  TRUE or FALSE

Question 30

Chris is a young newly authorised representative employed by AFS Licensee, Wealth Pty Ltd.  He reports to Client Service Manager, Robert whose job is to supervise a team of three advisers, including Chris, and to ensure quality output and that the team meets its production and income targets.

Chris is the newest and least experienced adviser in the team, but he is keen to learn.  There is always budget pressure from Robert and as a result, Chris works long hours to complete his work on time and is often tired at work.

  1. Although well meaning, Chris sometimes forgets to do something for clients that he promised in client meetings. This sometimes draws some negative feedback from clients.

Which value is Chris most likely failing to demonstrate, realise and promote?

  1. When recommending investments, Chris always treats client’s money as if it is his own. Chris is naturally conservative and tends to be that way when investing client’s money.

Which value is Chris most likely failing to demonstrate, realise and promote?

  1. Chris often works after hours to complete client work on time. As a result, he does not arrive home at night in time to see his young son before his bedtime; and Chris often forgoes a social life because he works most weekends.

Which value is Chris most likely acting to demonstrate, realise and promote?

  1. Even though Chris is relatively inexperienced, budget pressure forces Robert to ‘throw Chris into the deep end’ by loading him with work on complex cases. As a result, mistakes are made and there are gaps in the advice; and clients are becoming unhappy.  Robert scolds Chris about his mistakes and lack of adherence to Robert’s high standards.

Bearing in mind that the Code of Ethics applies only to the relevant provider, what should Chris do to ensure he discharges his ethical obligations to each of his clients?

Question 31

SCENARIO

Ted is an existing client, 60 years old and comes to see you for retirement advice.  He is still working.  Ted has two adult sons who you know well but they are not clients.  They do not live with Ted.

Ted is in a relationship with Susan who is 35 years old with two young (minor) children.  Ted’s adult sons do not like Susan and think that she is simply after Ted’s money.  Susan’s two young children do not like Ted.

Susan and her two children moved in with Ted 6 months ago and Ted & Susan are now living in a de facto relationship.

Susan has recently asked Ted for $60,000 to develop a new app.  Ted calls you to arrange an appointment to see you.  You are expecting Ted alone, but unexpectedly, he brings Susan.

Ted tells you that he has sufficient money in a bank account to cover the $60,000 and has no immediate use for the money.  Although Ted wants to help Susan, he wants your guidance as to whether he could still have a comfortable retirement.

He also makes it clear that he wants his two adult sons to inherit all of his money, assets and superannuation.  Ted has $400,000 in his superannuation fund and would also like advice on how to build it up before he retires in 5 years’ time.

Questions

  1. What is the first thing you should do now that Susan has unexpectedly joined the meeting?
  2. What is one (1) potential impact that Ted’s relationship with Susan is likely to have on the future distribution of his personal estate (in the event of Ted’s death).
  3. Write down two (2) estate planning strategies that Ted may need to review?

Question 32

SCENARIO

A client couple, Des and Denise divorced 3 years ago.  As a result of the property settlement, Des stayed in the former family home and Denise moved interstate.  They both have personal risk insurance products that you arranged for them when they were married.

Denise, who you have not heard from since the divorce proceedings started, now contacts you requesting a review of her insurance cover.

Questions

  1. Once the divorce is completed, you can in principle retain both people as separate clients without a conflict of duty TRUE or FALSE
  2. Which advice disclosure document will you provide to Denise in relation to the review she has requested?
  3. How should you handle the automatic annual renewals that have occurred during and after the divorce?

Question 33

SCENARIO

An adviser stores confidential client personal information in a cloud facility operated by an offshore provider.  The account is hacked and the hacker accesses a retired client’s email and illegally accesses the client’s private account details for his SMSF bank account.

The adviser receives an email from his overseas client (via hacked email account) requesting that he sell down $550,000 of his SMSF investments and transfer the money to an overseas bank account nominated in the email.

Shortly after the transfer is complete, the client phones the adviser and tells him that $550,000 has disappeared from his SMSF.

QUESTIONS

  1. Who is responsible?
  2. Which standard has been breached?
  3. How should the adviser go about reporting this?
  4. Besides reporting this, what other actions should the adviser take?
  5. What could the adviser done to prevent the disappearance of the client’s money?

Question 34

In regard to delivering a FSG to a client or prospective client, determine whether the following statements are TRUE or FALSE.

A. Publishing an FSG digitally and notifying the client that the disclosure is available is fine, regardless of whether the client is first given the opportunity to opt out of this method of delivery TRUE or FALSE 

B. An FSG does not have to be provided if the financial service is general advice provided in a public forum but certain information must be provided to the client before the advice is provided. TRUE or FALSE

C. An FSG does not need to be given to a client if the client has already received an FSG provided that the information remains unchanged. TRUE or FALSE

D. Failure to provide an FSG in a setting (e.g. a social setting) that is not in a meeting and is not a telephone call is unlikely to contravene the Corporations Act where it becomes apparent that general advice is likely to be provided to a retail client and the providing entity then asks the client for their postal or electronic address and the client refuses to provide their address to the providing entity. TRUE or FALSE

E. Where the need to provide an FSG becomes apparent during a telephone call with a prospective client, the providing entity must tell the client that a Financial Services Guide exists and that the provider will send out a Financial Services Guide on request. TRUE or FALSE

F. An FSG must be provided if it becomes apparent that the financial service relates to a basic deposit product including an interest in a cash management trust. TRUE or FALSE

Question 35

SCENARIO

You are a risk insurance adviser.  A client named Dave comes to you for advice regarding income protection.  You do all the right things including FSG, fact find, standard health questionnaire; plus a ‘needs analysis’ and you research three products and provide an insurer’s quote for each.

You recommend a suitable income protection product and highlight Dave’s need for additional Life & TPD insurance.   As part of your normal process, you explain to Dave in detail his Duty of Disclosure to the insurance company (i.e. he must disclose all medical information he knows or would be reasonably expected to know) and the consequences of any non-disclosure.

You arrange for Dave to undergo a health interview directly with the insurer, where the insurer explains Dave’s Duty of Disclosure to the insurer and asks a series of detailed questions about the client’s current and past health.

The insurer has not yet accepted Dave’s application but is expected to do so shortly at standard rate pricing (i.e. no price loading and no excluded medical conditions) as per their original quote.

A few days later, another client named Ted comes in seeking income protection advice.  He tells you that he and Dave are work colleagues and he states that he wants the same inexpensive policy as the one Dave got because he needs a regular income.  Ted also discloses that both he and Dave work in a warehouse and both need to take time off from time to time due to ongoing back problems.

You realise that it is likely that Dave has not disclosed a back problem history to the insurer.

QUESTIONS

Q1. What is the first thing you should do?

a) Contact Dave and discuss this with him. If true, remind him of his ongoing duty of disclosure and the consequences of not doing so; strongly encouraging him to make immediate full and truthful disclosure to the insurer

b) Contact the insurer and tell them of Dave’s non-disclosure

c) Make a file note in Dave’s file regarding the conversation with Ted, in the event that you are questioned later about the issue

d) Do nothing

 

Q2. Name two (2) things that could prove to be a problem with Dave’s policy if he has not disclosed his back problem?

Q3. Name two things that should concern you as the adviser about Ted’s intentions to acquire the same policy at the same price as Dave

 

Q4. What is the least likely action you should take?

a) Research alternative products taking into account Ted’s back problem

b) Explain the likely consequences of Ted’s back problem on his insurability

c) Provide Ted with income protection with no exclusion related to his back problem

d) Advise Ted that you now have a conflict of interest and refer him to another adviser

Question 36

Define a tax (financial) advice service?

Question 37

The Financial Planners and Advisers Code of Ethics 2019 is which of the following?

a) A legislative code

b) A principles based code

c) A professional conduct code

d) An industry code

Question 38

An adviser issues a Statement of Advice to a client with the following disclosures:

  1. The adviser is the director of a licensee company that is a party to binder with a risk insurance company
  2. An ongoing fee being 0.66% of the $550,000 assets under management
  3. An upfront risk insurance commission of $2,800 of which 50% is rebated to the client
  4. A commission of $2,200 of which 100%is rebated the client

Which one of the above disclosures is consistent with the adviser being able to use the restricted term ‘unbiased’ advice?

Question 39

A licensee company trading as Unbiased Advice R Us has two directors, Ted and Jane.  Both are authorised to provide personal advice to retail clients.  Neither receives any commissions, volume-based payments, nor other gifts or benefits.

Unbiased Advice R Us Pty Ltd subsequently authorises two new representatives Alice and Bob.  Alice and Bob both receive % based asset fees and commissions. All four advice providers operate free from any APL product restrictions.

Are the following statements TRUE or FALSE?

  1. Alice and Bob cannot use the term ‘unbiased’ because they receive commissions. TRUE / FALSE
  2. Ted and Jane can continue to use the term ‘unbiased’ because they don’t receive commissions, volume-based payments, or other gifts or benefits TRUE / FALSE
  3. The licensee company’s trading name can no longer include the term ‘unbiased’. TRUE / FALSE

Question 40

  • A licensee company, called ‘Non-aligned Boutique Advice’ provides personal advice to retail clients. The company receives commissions and % based asset fees.

Which of the following names is most likely to be acceptable under s923A?

  1. Non-aligned Boutique Advice
  2. Locally-owned Boutique Advice
  3. Privately-owned Impartial Advice
  4. Locally-owned Unbiased Advice
  • The licensee company now changes its remuneration policy and meets all of the conditions necessary to be able to call itself an ‘independent’ advice practice. The company employs and authorises an advice provider.
  1. Can the new employee / advice provider accept an occasional gift valued at less than $300 from a product provider?  YES or NO
  2. Can the advice provider’s employer accept an occasional gift valued at less than $30? YES or NO

Question 41

AFS Licensee Company, Go-getter Pty Ltd purchases a book of business from another AFS Licensee Good Advice Pty Ltd.  At the completion of the sale, Good Advice Pty Ltd voluntarily ceases it AFS Licence and proceeds to shut the company down.

Questions

1. Because the sale proceeds received by Good Advice Pty Ltd come from a 3rd party, it is caught under the conflicted remuneration rules. TRUE or FALSE

2. Under the record keeping rules, Good Advice Pty Ltd must keep client records for 7 years or until the Licensee ceases trading, whichever comes sooner. TRUE or FALSE

3. As it reviews its newly acquired clients, what is the first thing Go-getter Pty Ltd must do? ______________________________

4. Because most of Go-getter’s newly acquired clients have received a Statement of Advice in the last three years, a Record of Advice can be issued at the first review for ongoing advice. TRUE or FALSE

5. New AFS Licensee, Go-getter Pty Ltd discovers that a group of 50 clients who have been charged ongoing fees for the past 5 years but no fee disclosure statements or renewal notice has ever been issued. These clients are being charged an annual fee of 2% of funds under management ($550,000) for the following reasons:

  • To be on the books of Good Advice Pty Ltd
  • An entitlement to make 2 telephone calls a year if they needed to ask a question
  • An entitlement to an annual review which they would pay full price for (ultimately none of the 50 clients were reviewed or offered a review in the past 10 years)

In regards to the ongoing fees being charged:

Q1. What was Good Advice Pty Ltd’s legal obligation to these clients?

Q2. Which ethical standard is most relevant?

Q3. Which value is the most relevant?

Q4. What two (2) actions should Go-Getter Pty Ltd take to remedy this situation?

  1. ____________________
  2. ____________________

Question 42

Stark Advice Pty Ltd holds an AFS Licence.  The company’s sole director Herman Stark is authorised to provide advice to retail clients.  Mr Stark is also the subject of a client complaint to AFCA.  Although he defended the complaint, AFCA issued a determination against him which involved a significant amount of money to be paid to the client by way of remediation for inappropriate superannuation investment advice.  The complainant has accepted the determination and Mr Stark has refused to pay within the prescribed time limit.

Questions

  • What is the prescribed time limit for Mr Stark to pay if the complainant accepts the AFCA determination?
  • What is the general claim limit for complaints to AFCA?
  • Apart from general insurance and uninsured motor vehicle claims, what is the compensation claim limit (on or after 1 Jan 2021) in most claims of direct financial loss, except for superannuation?
  • What is the monetary restriction on AFCA’s jurisdiction for Question 3 above?
  • What is the AFCA compensation cap for a superannuation complaint?

Q. Which of the following statements about AFCA is incorrect?

  1. All of AFCA’s cost will be borne by the licensee
  2. A determination made by AFCA is only binding on the licensee. If a complainant does not like AFCA’s finding, they can just ignore it and go to court anyway
  3. The obligation to be a member of AFCA is triggered by providing services to retail clients
  4. AFCA limits its service to retail clients only

 

Q. What is likely to happen to Mr Stark for not complying with the AFCA determination? _______________________

 

ANSWERS TO PRACTICE QUESTIONS

Question 1

Insurance commissions are explicitly allowed by law and may be an acceptable form of remuneration for advice. In the context of a specific client situation, which of the following does an adviser need to do in relation to Standard 3 before acting for a client?

  1. Satisfy themselves that the advice and product recommendation is in the best interests of the client
  2. The commission received is fair and reasonable and represents value for the client and is fully understood by the client;
  3. The client understands benefits, costs and risks of the insurance advice; and the advice and fee structure are appropriate for the client
  4. A disinterested or unbiased person, in possession of all the facts, would reasonably conclude that the remuneration would not lead the adviser to prefer the interests of someone (including their own) over the client’s best interest.
  5. All of the above

Reference: Theme 2: Clarifying the Operation of Standard 3 and Forms of Remuneration: Preliminary Response to Submissions FG002 Financial Planners and Advisers Code of Ethics 2019 Guidance

Question 2

Ted is a relevant provider who operates through a private company which is a Corporate Authorised Representative (CAR) of Ted’s AFS Licensee.  Ted is the company’s only adviser and he is the sole director of the company.  Ted’s remuneration is directly related to advice fees, insurance commissions and referral fees (received from a number other professionals to whom he refers clients). Ted’s Licensee pays this remuneration to Ted’s CAR each fortnight. Ted then draws a regular salary from his company (CAR).

In relation to Standard 7, are the following statements TRUE or FALSE?

  1. Referral fees received from the AFS Licensee via Ted’s company (CAR) can form part of Ted’s remuneration drawn from his company, provided that Ted demonstrates compliance with the Code in the same manner as advice fees and insurance commissions received. TRUE or FALSE
  2. Ted can receive the advice fees and insurance commissions but the referral fees received from the AFS Licensee via Ted’s company (CAR) cannot form part of Ted’s remuneration drawn from his company because relevant providers are banned from receiving referral fees; therefore Ted must cease the payments from his referral partners. TRUE or FALSE

Reference: Theme 3: Clarifying Referral Fees: Preliminary Response to Submissions FG002 Financial Planners and Advisers Code of Ethics 2019 Guidance

Also note the interpretation of Standard 3 in the recently released  “Financial Planners & Advisers Code of Ethics Guide, October 2020”

“Standard 3 of the Code is concerned with an actual conflict between duties advisers owe their client and any personal interest they have or an actual conflict between duties they owe their client and duties they owe another individual or organisation.”

The Code does not seek to ban particular forms of remuneration, nor does it determine that particular forms of remuneration will always give rise to an actual conflict of interest or duty. That said, you should remain open to the possibility that certain forms of remuneration will always fail to meet the requirements of the Code of Ethics.”

It proposes a test to be applied

“Whether a disinterested person (i.e. an unbiased third party with nothing to gain or lose from how the question of conflicts is resolved), who knows all of the facts, would reasonably conclude that the arrangement could induce the adviser to act other than in the best interests of the client then, that arrangement gives rise to a conflict and is prohibited.”

Step 1 – Pass the test above AND

Step 2 – Then ensure that:

  • the advice will be in the best interests of the client;
  • the fees and charges (regardless of type) will be fair and reasonable and represent value for the client and are fully understood by the client;
  • the client will understand the benefits, costs and risks of the recommendations made; and
  • the advice and fee structure will be appropriate for the client.

All of the wording above is about determining whether or not you have an actual conflict.  If you do realise (or should have realised) that you have an actual conflict, then para 37 (Explanatory Statement) is invoked.

That is – “the primary ethical duty in this Standard is that, if you have a conflict of interest or duty, you must disclose the conflict to the client and you must not act.  If the client wishes, you may refer the client to another relevant provider if neither you nor your principal will receive any benefits from the referral.”

It is interesting that “your principal” is included here because the Code of Ethics applies only to the relevant provider (the advice provider).   But again, this only applies if you find yourself in a position of an actual conflict.

 Question 3

In regard to the Financial Planners and Advisers Code of Ethics 2019, are the following statements TRUE or FALSE?

  • A relevant provider is bound by this compulsory code of ethics when providing personal advice and services to a wholesale client TRUE or FALSE
  • A relevant provider is bound by this compulsory code of ethics when providing general advice to a retail client TRUE or FALSE
  • A relevant provider is bound by this compulsory code of ethics when providing personal advice and services to a retail client TRUE or FALSE

Reference: Theme 5: Clarifying Application of the Code to Forms of Advice Beyond Personal Advice on Retail Financial Products: Preliminary Response to Submissions FG002 Financial Planners and Advisers Code of Ethics 2019 Guidance

 Question 4

Sandra is a financial adviser and relevant provider.  She has existing clients who she does not regularly contact where she continues to receive commission.  These clients are grandfathered as per the pre-FOFA requirements.

In relation to Sandra meeting Standard 4 and seeking consent from these clients after the introduction of the Code of Ethics on 1 January 2020, are the following statements TRUE or FALSE?

  1. Sandra will need to contact these clients as soon as practicable, to seek their signed consent post 1 January 2020 TRUE or FALSE
  2. Sandra will need to download the appropriate FASEA approved form to meet this Standard 4 requirement TRUE or FALSE
  3. Sandra may use an existing form to obtain signed consent from these clients for example, a Service Agreement, an Authority to Proceed with Advice TRUE or FALSE

Reference: Theme 6: Clarifying the Timing and Format of Client Consent: Preliminary Response to Submissions FG002 Financial Planners and Advisers Code of Ethics 2019 Guidance

 Question 5

In relation to the definition of financial products, services and financial product advice for the purpose of requiring a AFS licence or not, are the following statements TRUE or FALSE?

A financial product is a facility that allows a person to make a financial investment, manage a financial risk or make non-cash payments.  TRUE or FALSE

RG 121.20

 Question 6

Generally, you are providing a financial service if you provide financial product advice or deal in a financial product, but not if you are providing traditional trustee company services TRUE or FALSE (the definition includes traditional trustee company services)

RG 121.24

Question 7

Financial product advice is a recommendation or a statement of opinion, or a report of either of those things, if it is provided with the intention of influencing a person’s decision in relation to a financial product.

In determining whether a communication constitutes financial product advice, which of the following statements is NOT TRUE?

  1. It depends on the overall impression and circumstances of a communication
  2. Whether the communication is merely factual information
  3. Whether a decision on a particular financial product or class of financial product is made
  4. Whether the advice provider intends the communication to influence the person’s decision in relation to a financial product

Option 4 above is not included in the RG121.26 definition

RG 121.26 The following considerations will help you determine whether a
communication constitutes financial product advice:
(a) the overall impression and circumstances of a communication;
(b) whether the communication is merely factual information; and
(c) whether a decision on a particular financial product or class of financial
product is made.

Question 8

There are two types of financial product advice under the Corporations Act.  They are personal advice and general advice.  TRUE or FALSE?

Question 9

Personal advice is financial advice given or directed to a person (including by electronic means) in circumstances where the advice provider has considered one or more of the person’s objectives, financial situation and needs; or a reasonable person might expect the provider to have considered one or more of those matters.  TRUE or FALSE

(The definition states that personal advice is ‘financial product advice’, not ‘financial advice’ therefore it relates to advice related to a financial product, and does not include all financial advice such as debt management, budgeting and saving.)

Therefore, the correct answer would read …Personal advice is financial product advice given or directed to a person (including by electronic means) in circumstances where the advice provider has considered one or more of the person’s objectives, financial situation and needs; or a reasonable person might expect the provider to have considered one or more of those matters.

RG 121.75 / RG 175.26

 

 Question 10

A communication might be exempt from being financial product advice if it is advice given by a lawyer or tax agent (in the course of their ordinary activities) or is a quote relating to the cost of a financial product or the rate of return on a financial product.  TRUE or FALSE

RG 121.27

Question 11

Is the following statement TRUE or FALSE?

“You can give factual information and general advice by telephone, email, internet, video conferencing or face-to-face, but personal advice must be provided face to face only and followed up within 5 days in writing with the appropriate disclosure document required by the Corporations Act.” TRUE or FALSE

The Corporations Act is neutral about technology in relation to all advice.

RG 244.94

 Question 12

In relation to general advice, are the following statements TRUE or FALSE?

  1. When you are giving general advice to a client you should give a general advice warning TRUE or FALSE RG 244.44
  2. In s949A(2), the Corporations Act sets out the wording to be used in a general advice warning. The Act also requires that this exact wording must be used when giving general advice.  TRUE or FALSE  RG 175.52
  3. You should take reasonable steps to ensure that the client understands that you have not taken into account their objectives, financial situation or needs in giving the general advice. TRUE or FALSE RG 244.44
  4. When giving a general advice warning orally, the warning can be reduced to, “The advice is general advice; and the advice may not be appropriate for you (the client).” TRUE or FALSE    RG 175.55 (See ASIC Corporations (General advice Warning) Instrument 2015/540)

Question 13

Which of the following statements is NOT a statutory inclusion (Corporations Act) in a written general advice warning to a retail client?

  1. The advice is not personal advice and a Statement of Advice will not be issued
  2. the advice has been prepared without taking account of the client’s objectives, financial situation or needs; and
  3. Because of that, the client should, before acting on the advice, consider the appropriateness of the advice, having regard to the client’s objectives, financial situation and needs; and
  4. If the advice relates to the acquisition, or possible acquisition, of a particular financial product—the client should obtain a Product Disclosure Statement (PDS) relating to the product and consider the Statement before making any decision about whether to acquire the product

S949A(2)

Question 14

Is the following statement TRUE or FALSE?

“Failing to provide a general advice warning when one is required is a civil liability contravention” TRUE or FALSE

S949B Note – Failure to comply with this subsection is an offence (see subsection 1311(1)).

Question 15

Which of the following statements is the most correct?

  1. A general advice warning must be given to the client before the advice is provided and can be communicated by any effective means.
  2. A general advice warning can be given to the client after the advice is provided and must be communicated by the same means as the advice is provided.
  3. A general advice warning must be given to the client at the same time as the advice is provided and by the same means as the advice is provided.
  4. A general advice warning must be given to the client at the same time as the advice is provided and can be communicated by any effective means.

s949A(3)

Question 16

  1. A stockbroker prepares periodic newsletters or research reports containing assessments of various financial products and sends them to their entire client list. Is this more likely to be factual information or general advice?

ASIC Guidance

We would expect that those newsletters or research reports would ordinarily be general advice and not personal advice. We would expect them to contain a general advice warning under s949A. This is because the stockbroker would not ordinarily take into account any individual’s relevant circumstances in preparing and providing a periodic newsletter or research report that is sent to all of their clients, and nor would a reasonable person expect them to have done so.

See Example A1 Table 7 Appendix 1 (page 108) RG175

 

2. An adviser sends different newsletters, research reports or marketing brochures to different segments of their client base, using personal information from the adviser’s database to decide who is to be included in each segment. Is this more likely to be factual information or general advice?

ASIC Guidance

In general, we think this adviser is likely to be providing general advice when, in deciding to send a particular newsletter, research report or marketing brochure to a particular segment of their client list, they look at broad client groupings based on: e.g.

  • the size of a client’s portfolio;
  • whether a client currently invests in, or has expressed interest in receiving information about, any of the broad market sectors discussed in the newsletter (e.g. property trusts, the industrials sector);
  • a client’s age;
  • whether a client is employed or retired; or
  • whether a client has used the person’s services within a particular timeframe.

See Example A5 Table 7 Appendix 1 (page 108) RG175

Question 17

The following statement is made by Emma, a financial planner, to her client William.  Is it factual information or general advice?

“In regard to the inheritance you have just mentioned, one option is to pay off debts such as a mortgage, personal loan, car loan or credit card debts. Paying off a loan will save interest, although you may incur exit fees and it may have taxation consequences if the loan is for investment purposes. There are a lot of investments to choose from—too many to cover now, but I can give you some information about some of the more common options. First-home saver accounts can be used by people who are saving to buy or build their first home.” FACTUAL or GENERAL ADVICE

In this example, Emma doesn’t need to operate under an AFS licence because no financial product advice is being given.

Page 38 Appendix RG244 (please read entire example)

 Question 18

In a subsequent call by client William to financial planner Emma in regards to the inheritance he received, the following statement is made by Emma.  Is it factual information or general advice?

“Yes, I’ll take you through the investments we generally recommend to our clients. Generally, for clients who receive an inheritance, I would recommend that they first pay off loans such as personal loans, car loans or credit cards. Reducing this debt will free up cash flow.  Before paying off any debt, I advise clients to consider whether early termination or legal fees apply.  FACTUAL or GENERAL ADVICE

In this example, Emma is operating under an AFS licence because she is providing general advice: see s911A. Also, at the point this statement is made, Emma should provide a FSG.

Page 39 Appendix RG244 (please read entire example)

 Question 19

A record of advice must be prepared as a written document and kept on the client’s file except where the corporations Act requires the document to be provided to the client TRUE or FALSE

A record of advice may be kept as a written document or a recording

RG175.182

 Question 20

Sarah is an authorised representative of Australia Wide Financial Advisers, an AFS licensee. Sarah does not receive any commissions, volume-based payments, or other gifts or benefits.

Australia Wide Financial Advisers authorises two other representatives, Colin and Chris, to provide advice on its behalf. Australia Wide Financial Advisers receives commissions, and Colin and Chris also receive commissions.

  1. Can Sarah use the terms independentimpartial or unbiased? YES or NO

Sarah cannot use a restricted term under s923A because the Licensee, Australia Wide Financial Advisers receives commissions.  Even if Australia Wide Financial Advisers itself does not receive commissions, Sarah would still not be permitted to use a restricted term, because Australia Wide Financial Advisers two other authorised representatives Colin and Chris receive commissions.  (RG 175.67 Example 1 page 21)

  1. Can Sarah use the words independently owned, non-aligned or non-institutionally owned? YES or NO

No, because these words and expressions are ‘of like import’ to the words specified in s923A(5)(a).  See RG175.70

  1. Can Sarah use the words locally owned or privately owned? YES or NO

Yes, words and expressions that refer to ownership but do not imply or suggest whether there is a relationship with a product issuer are more likely to be acceptable, although this will depend on the context in which they are used.  RG 175.72

Question 21

Scenario

Mike and his wife Melanie are almost age pension age and want to retire very soon.  They have a home valued at $1.2M and because they were both self-employed in their own business, they only have $350,000 of super between them.

They seek advice from financial planner Mary in relation to downsizing their home and relocating; as well as her advice in relation to applying for the age pension.

During the initial interview with Mary, Melanie leaves the room.  While she is out, Mike tells Mary that he has a $100,000 Term Deposit that Melanie doesn’t know about.

Questions

  1. Which Standard should Mary be primarily thinking about before she responds to Mike’s admission?

Standard 3 – this has placed Mary in a difficult position and besides having an ethical dilemma, she now has a conflict of duty.  Unless the secret is brought into the open, it may be very difficult for Mary to act for both clients.

How can Mary be honest (transparent, frank and fair), and act with integrity in the best interests of Melanie if she keeps Mike’s secret?

Standard 2 para 35 – Mary must treat both clients in a respectful and professional way; she must treat both clients fairly, as between themselves.

Standard 2 para 36 – Mary should take into account Mike’s express wishes but these do not override Mary’s duty to give advice that is in Melanie and Mike’s best interests.

  1. What should Mary say to Mike in response to his admission?

“Mike, thank you for sharing that information however, it is vital to my provision of advice to you both that you also share this information with Melanie.  You have put me in a difficult position and, if we are to proceed today, you need to tell Melanie when she returns to the room otherwise I will have to tell her.  There are practical reasons why Melanie needs to know about the term deposit. It is critically relevant to the advice you are seeking. If this information is not shared with Melanie I will no longer be able to provide advice and act in the best interests of both of you.”

  1. In the context of the advice sought by Mike and Melanie, provide two (2) practical reasons why Mike needs to tell Mary about the $100,000 term deposit.
  • Mike may choose to withhold the information from Melanie but it will an offence to withhold the information from Centrelink; and to accept an age pension overpayment based on the basis of false information will amount to Centrelink fraud.
  • If Mike and / or Melanie apply for the age pension, both will have to sign the application because combined income and assets are assessed for the purposes of the income and assets tests.
  • The $100,000 term deposit is relevant to Mary’s advice on downsizing and relocating, as it could affect the deposit / lending requirements for the new home. Mike and Melanie will also need to be honest when dealing with a lending institution.

Additional Scenario

Mike and Melanie ask Mary if she could, for a fee, find an ideal (downsized) home for them if they gave her a full brief of their needs.

Questions

  1. Is the service requested by Mike and Melanie a financial product? YES or NO? see RG 121.20
  2. Should Mary be providing this service as a financial planner? YES or NO?
  3. Which is the most applicable ethical value that Mary should be considering in this situation?

Fairness – Mary should self-reflect on the limits of her professional competency and on her capacity to deliver or access the necessary professional services required in the engagement in a manner that benefits her clients.  (You might also argue that ‘competency’ is the main ethical issue here, and you may well be correct.  My reasoning in this answer is that it’s a highly relevant factor that Mary takes into consideration in her decision to be fair to her client).

  1. Which is the most applicable ethical standard that Mary should be considering in this situation?

Standard 10 para 61 – “…. For example, if you specialise in a particular area, you should not provide advice outside that area unless you have the necessary skills and competencies to do so in a professional way.”

  1. If Mary refers Mike and Melanie to a licensed real estate agent, is Mary able to receive, with the client’s written consent, part of the commission received by the real estate agent on the sale of their house? YES or NO.
  2.  Which the most applicable ethical standard in this situation?

Standard 7 – para 54 – this Standard prohibits you receiving “third party” benefits for acting for a client (unless the Act expressly allows).

Question 22

Scenario

Wayne is a risk insurance adviser.  He is providing personal insurance advice to Lucy. He is providing scaled advice, where the subject matter is limited to switching Lucy’s Trustee-owned Life & TPD insurance policies in her superannuation account to non-superannuation self-owned Life & TPD policies.

Wayne undertakes a fact find interview with Lucy where he gathers her personal details and information relevant to her existing trustee-owned Life & TPD policies.  He undertakes adequate product research, and then takes the time to carefully explain the proposed new policies to Lucy, as well as the differences between old policies and new.  An initial quote from the proposed insurance provider (before underwriting) indicates that Lucy can have the benefit of a higher amount of Life & TPD insurance for the same premium cost as she is currently paying in her superannuation account.

Based on information gathered as described above, Wayne’s final recommendation to Lucy is $500,000 life & TPD insurance and $100,000 trauma insurance.

Questions

  1. What is the problem with Wayne’s advice?

Wayne has not included the trauma insurance in the subject matter and it has not been scoped into the advice.  In effect, it is a last minute add-on.  Also, Wayne has not asked Lucy for any health information or family history information in relation to trauma insurance.  He only gathered her personal details and information relevant to the Life & TPD policies.

  1. What does Wayne need to do correct this situation?

If Wayne considers the lack of trauma insurance to be part of her relevant circumstances, he needs to go back to Lucy to discuss this and revise the subject matter of the advice.  If Lucy agrees to include the trauma insurance in the subject matter and have it scoped into the advice, Wayne needs to collect more information from Lucy, including relevant health information and do further investigation into trauma policies.

RG 175.281 – either an advice provider or the client may suggest limiting or revising the subject matter of advice sought by the client. If a client seeks advice on a revised subject matter, the advice provider must comply with the best interests duty and related obligations in Div 2 of Pt 7.7A in relation to the revised subject matter.

  1. Which Value has Wayne most likely failed to demonstrate, realise and promote?

Diligence – Wayne has not exercise due care and skill in the way he has scoped the advice provide to Lucy and has not gathered sufficient information / undertaken adequate investigation to support his trauma insurance recommendation

  1. Which Standard has Wayne most likely breached?

Standard 2 – FASEA regards incorrect scoping is a Standard 2 breach – refer to para 29 Explanatory Statement.  These are reinforced by Standard 5 para 45 and Standard 6 par 50.

Question 23

Scenario

Matt is a self-employed electrician.  He works 6 days a week and runs a successful business.  On Saturdays, he does cash jobs at a discount for friends, family and some elderly customers who otherwise couldn’t afford his service.

Matt comes to see you as a new client.  When you are gathering information on his income, he mentions the cash jobs and the fact that he keeps two sets of books.

Questions

  1. You should refer Matt to an accountant? TRUE or FALSE
  2. Should you give Matt advice on cash flow management? TRUE or FALSE
  3. You suspect that Matt is not paying income tax on the money he receives from his cash jobs. What should you do?  Submit a Suspicious Matter Report (SMR) to Austrac within 3 business days

Additional Scenario

Matt asks you if you, as a tax financial adviser, would prepare his tax return as part of your fee-for-service package.

Questions

  1. Are you permitted to provide this service? YES or NO

There is a legal requirement that you must not charge or receive a fee or other reward if you provide a service which you know or should reasonably know is a tax agent service and you are not a registered tax agent. A similar requirement applies to lawyers preparing or lodging tax returns, they too must register. These registration requirements are not part of the definition of tax agent services, but are set out in section 50-5 of the Tax Agent Services Act 2009 (TASA).  Civil penalty applies.

https://www.tpb.gov.au/tax-agent-services

  1. Matt asks you what a tax financial adviser is.

Your reply that “It is a tax agent service which excludes representations to the Commissioner of Taxation, provided by a financial services licensee or a representative of one, that is provided in the course of giving advice of the kind usually given by a financial services licensee or a representative of one, where that services relates to advising an entity about its obligations or entitlements that arise or could arise under a taxation law and (what)?  Complete the definition from the choices below.

  1. Where the entity requires more detailed information it should consult a tax agent
  2. The entity can reasonably expected to rely on the service for tax purposes
  3. It is part of a strategic discussion about an entity’s long-term financial objectives
  4. It consists of preparing a return or a statement in the nature of a return for the entity

Reference: TPB Information Sheet TPB(I) 20/2014 What is a tax (financial) advice service?

https://www.tpb.gov.au/sites/default/files/tpb_information_sheet_-_what_is_a_tax_financial_advice_service_0.pdf?v=1468807919

Question 24

Scenario

Cathy is a single mother, 40 years of age, who is incapacitated.  Her only child is her teenage son, Angus who is 15 years of age and lives with her.  Cathy has a modest income and some investments. Her main priority is to take care of her teenage son and provide him with a good upbringing and education.

Cathy has been a client of financial planner Ronald for 3 years and she comes in to see Ronald every 6 months for a review.  Cathy is a balanced investor. Half of her investments are in superannuation and the other half ($25,000) is invested and diversified in a portfolio of managed funds.  Any withdrawals from the portfolio will incur an exit fee.

3 months after her last review, Cathy contacts Ronald to arrange an appointment.  Cathy arrives for the appointment with her new boyfriend, Craig.  She tells Ronald that Craig has a private property scheme that he has suggested she might like to invest in, and it promises high returns.  She wants to withdraw her $20,000 from her managed fund portfolio.

Questions

What are two disadvantages of Cathy changing from the managed fund portfolio to Craig’s proposed property scheme?

  • Cathy will incur an exit fee
  • Cathy increases her investment risk by leaving a diversified balanced managed fund portfolio to invest in a single asset class
  • Ronald is a professional adviser who would have conducted research as part of his investigations into a managed fund portfolio that suited Cathy’s needs; whereas Craig is unqualified and no research has accompanied the proposed private property scheme
  • The managed fund portfolio is a much more liquid asset than (Craig’s) private property scheme
  • There is a very high chance of the private property scheme ultimately producing lower returns that Cathy’s current managed fund investment which would have the consequence of impairing her ability to meet her main priority of providing her son Angus with a good upbringing and education

Question 25

Scenario

Jane is an experienced and competent financial planner.  She has a two-tier fee charging system based on the client’s ability to pay; where she charges high net worth clients a higher hourly rate for her advice services and charges low net worth clients a lower hourly rate.  She tells low net worth clients that their fees are being subsidised.

Questions

  1. Which value is applicable in this instance?

Fairness – among other things, being fair requires that you look beyond your own interests and consider how others may judge or perceive your actions. Would your conduct stand public scrutiny by your professional peers and by the community?

  1. Has Jane breached any of the Standards and if so, which one?

The applicable standards are:

Standard 7 – all fees and charges payable to you or your principal, and benefits you or your principal receive, for acting for the client are fair and reasonable, and represent value for money for your client.

Standard 2 Para 35 – 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.

Commentary

The ‘low net worth’ clients receive a higher level of value for their money and Jane is trying to be fair to them by making her advice more affordable.

However, the ‘high net worth’ clients are receiving a lower level of value for their money by being charged more for the same service; which arguably includes a premium to subsidise the provision of advice to the ‘low net worth’ clients.  But they are not told that part of their fee is effectively a subsidy.

The notion that one group subsides another group suggests unfairness to the group that are doing the subsiding without their knowledge or consent.

All professionals are entitled to perform ‘pro-bono’ work. Therefore, Jane would be presenting her fee schedule in a fair manner if the ‘high net worth’ clients were charged the standard fee and Jane is discounted her services to ‘low net worth’ clients as their circumstances dictated.

Question 26

Margaret a financial adviser is conducting a fact find interview with a new client Tom.  Tom has come to see Margaret seeking a comprehensive financial plan.  At the completion of the interview, Margaret realises that for a number of reasons, a less complex plan might be more beneficial for Tom at this time.

Consider each statement below in terms of TRUE or FALSE

  1. Only Tom can suggest revising the subject matter of the advice he originally sought TRUE or FALSE
  2. Only Margaret can revise the subject matter of the advice originally sought by Tom TRUE or FALSE
  3. Either Margaret or Tom can suggest limiting or revising the subject matter of advice originally sought by Tom TRUE or FALSE

RG 175.291 Either an advice provider or the client may suggest limiting or revising the subject matter of advice sought by the client. If a client seeks advice on a revised subject matter, the advice provider must comply with the best interests duty and related obligations in Div 2 of Pt 7.7A in relation to the revised subject matter.

Question 27

Bill is an authorised representative of Licensee, Good Advice Pty Ltd, whose licence conditions excludes the provision of advice on direct shares or other listed securities.

In his personal capacity, Bill is an enthusiastic stock market investor.  In the course of communicating retirement related advice sought by Owen, Bill also makes a personal recommendation to client Owen about an upcoming Initial Public Share Offering (IPO).  This recommendation is verbal and not contained in the SoA.  Bill discloses to Owen that he is acting outside his authority in relation to Good Advice Pty Ltd by making the share recommendation.  Owen relies on the advice and makes a share purchase.  The IPO is an immediate flop and Owen makes a complaint to Good Advice Pty Ltd.

Consider each statement below in terms of TRUE or FALSE

  1. The licensee Good Advice Pty Ltd is not liable for the actions of authorised representative Bill TRUE or FALSE
  2. The licensee Good Advice Pty Ltd is liable for the actions of authorised representative Bill if Bill failed to disclose to Owen that he was acting outside his authority TRUE or FALSE

s917B – Responsibility if representative of only one licensee

If the representative is the representative of only one financial services licensee, the licensee is responsible, as between the licensee and the client, for the conduct of the representative, whether or not the representative’s conduct is within authority.

HOWEVER

s917D – Exception if lack of authority is disclosed to client

A financial services licensee is not responsible under section 917B or 917C for the conduct of their representative if:

  1. The conduct is not within authority in relation to the licensee (or in relation to any of the licensees, if there were more than one); and
  2. The representative disclosed that fact to the client before the client relied on the conduct; and
  3. The clarity and the prominence of the disclosure was such as a person would reasonably require for the purpose of deciding whether to acquire the relevant financial service.

Note:  A person must not hold out that conduct, or proposed conduct, of the person is within authority in relation to a particular financial services licensee, unless that is the case. See section 911C.

Also Note: The representative will be accountable.  The licensee has an obligation to report it to ASIC as a significant breach (see RG78 example 5 in Table 3 on page 11).

Question 28

In order to ensure that a client is likely to be in a better position if that client follows the advice, an advice provider is required to give which type of personal advice?

  1. Good advice
  2. Perfect advice
  3. Ideal advice
  4. Appropriate advice – defined as advice that is fit for its purpose, and following the advice is likely to satisfy the client’s relevant circumstance (RG 175.375a) and is likely to result in the client being in a better position if they follow the advice (RG 175.375b)

RG 175.257 – 248; s961G

Question 29

A licensee receives a volume-based benefit from a product provider as the result of ‘Authorised Representative A’ recommending a financial product to one of her clients.

Consider each of the following scenarios and determine whether the statement associated with each is TRUE or FALSE.

Scenario 1 – the licensee passes the benefit on to ‘Authorised Representative A’.

It is unlikely to be conflicted remuneration if ‘Authorised Representative A’ promptly passes the entire benefit on to the client and the licensee expects that it will be passed on to the client.   TRUE or FALSE

Scenario 2 – the licensee doesn’t pass on the benefit and keeps it instead.

It is likely to be conflicted remuneration if the AFS licensee uses the benefit to pay for its operating expenses.  TRUE or FALSE

Scenario 3 – the licensee passes on a portion of the benefit to ‘Authorised Representative B’.

It is unlikely to be conflicted remuneration if the licensee passes on a portion of the benefit to an authorised representative to help pay for the operating expenses of ‘Authorised Representative B’ and that ‘Authorised Representative B’ does not pass on this benefit to ‘Authorised Representative A’  TRUE or FALSE

RG 246.115 – 120

Question 30

Chris is a young newly authorised representative employed by AFS Licensee, Wealth Pty Ltd.  He reports to Client Service Manager, Robert whose job is to supervise a team of three advisers, including Chris, and to ensure quality output and that the team meets its production and income targets.

Chris is the newest and least experienced adviser in the team, but he is keen to learn.  There is always budget pressure from Robert and as a result, Chris works long hours to complete his work on time and is often tired at work.

  1. Although well meaning, Chris sometimes forgets to do something for clients that he promised in client meetings. This sometimes draws some negative feedback from clients.

Which value is Chris most likely failing to demonstrate, realise and promote?

Trustworthiness – Chris is not honouring his word even though it results from tiredness / forgetfulness

 

  1. When recommending investments, Chris always treats client’s money as if it is his own. Chris is naturally conservative and tends to be that way when investing client’s money.

Which value is Chris most likely failing to demonstrate, realise and promote?

Fairness – Chris is not being objective by allowing his personal biases to override his client investment recommendations

 

  1. Chris often works after hours to complete client work on time. As a result, he does not arrive home at night in time to see his young son before his bedtime; and Chris often forgoes a social life because he works most weekends.

Which value is Chris most likely acting to demonstrate, realise and promote?

Diligence – Chris is demonstrating a high level of commitment to client work

This is also part of the ‘honesty’ definition – Chris is putting client needs ahead of his own priorities to his personal detriment

 

  1. Even though Chris is relatively inexperienced, budget pressure forces Robert to ‘throw Chris into the deep end’ by loading him with work on complex cases. As a result, mistakes are made and there are gaps in the advice; and clients are becoming unhappy.  Robert scolds Chris about his mistakes and lack of adherence to Robert’s high standards.

Bearing in mind that the Code of Ethics applies only to the relevant provider, what should Chris do to ensure he discharges his ethical obligations to each of his clients?

This speaks to Chris’s competence to provide all advice services required of him, particularly from those clients with complex needs.  For each client, Chris should assess the professional services required in terms of subject matter & individual relevant circumstances.  He should then self-assess his own competence (knowledge & skills) to provide all of the advice required in each case.  He should then speak to Robert and / or his compliance manager for guidance on how to ensure the client’s needs are met.

Standard 2 imposes an ethical obligation on Chris to must treat all clients fairly, as between themselves; and to provide professional services to all clients, managing your business* so that each client has a fair share of your attention, skills and time.

*This may not be easy for Chris because it is not his business and yet he is the relevant provider and the only person bound by the Code of Ethics.

His first and only obligation is to his clients. Therefore, if Robert and / or the compliance manager fail to cooperate to achieve each client’s advice needs, Chris has an obligation to go back to the client and be truthful about how much of the advice he is competent to provide.

You may have other views on what is a very difficult situation for an employed financial adviser.

Question 31

SCENARIO

Ted is an existing client, 60 years old and comes to see you for retirement advice.  He is still working.  Ted has two adult sons who you know well but they are not clients.  They do not live with Ted.

Ted is in a relationship with Susan who is 35 years old with two young (minor) children.  Ted’s adult sons do not like Susan and think that she is simply after Ted’s money.  Susan’s two young children do not like Ted.

Susan and her two children moved in with Ted 6 months ago and Ted & Susan are now living in a de facto relationship.

Susan has recently asked Ted for $60,000 to develop a new app.  Ted calls you to arrange an appointment to see you.  You are expecting Ted alone, but unexpectedly, he brings Susan.

Ted tells you that he has sufficient money in a bank account to cover the $60,000 and has no immediate use for the money.  Although Ted wants to help Susan, he wants your guidance as to whether he could still have a comfortable retirement.

He also makes it clear that he wants his two adult sons to inherit all of his money, assets and superannuation.  Ted has $400,000 in his superannuation fund and would also like advice on how to build it up before he retires in 5 years’ time.

Questions

  1. What is the first thing you should do now that Susan has unexpectedly joined the meeting?

Before you can proceed with the meeting, you will need to determine what Susan’s status is in relation to your personal advice – i.e. is she merely an observer at this meeting, is she seeking personal advice in her own right (separately from ted), or is she now to be considered as part of a client couple with Ted.

You can’t assume that Ted and Susan automatically represent a couple for the purposes of your personal advice merely because Susan is an unexpected participant in the meeting.

Refer to Standard 6 – who is the client, who else do you need to take into account when formulating your advice, and to whom do you ultimately owe the best interests duty?

The advice you give Ted (alone) might be very different to the advice you give to Ted & Susan as a client couple.

  1. What is one (1) potential impact that Ted’s relationship with Susan is likely to have on the future distribution of his personal estate (in the event of Ted’s death).

Ted needs to know that, as a de facto partner, Susan may have a claim on his estate

  1. Write down two (2) estate planning strategies that Ted may need to review?

Will, superannuation nomination of beneficiaries, Enduring Power of Attorney

 

Question 32

SCENARIO

A client couple, Des and Denise divorced 3 years ago.  As a result of the property settlement, Des stayed in the former family home and Denise moved interstate.  They both have personal risk insurance products that you arranged for them when they were married.

Denise, who you have not heard from since the divorce proceedings started, now contacts you requesting a review of her insurance cover.

Questions

  1. Once the divorce is completed, you can in principle retain both people as separate clients without a conflict of duty TRUE or FALSE

Any conflict of duty would arise only during the divorce / property settlement period. Once that process completes, there is no reason why both can’t be clients again provided that you treat them as two separate clients.  However, if you are a risk adviser and the only advice you have provided to them as a married couple is to insure them, you may be able to continue to act for both (i.e. review cover) during the separation and divorce period provided that you treat them as two separate clients.  However, if there is super-splitting and investment splitting involved, you are more likely to have a conflict.  It depends on the circumstances.

  1. Which advice disclosure document will you provide to Denise in relation to the review she has requested?

After a divorce and property settlement, both Des and Denise will have new relevant circumstances including financial circumstances.  They may now be either single or part of another relationship.

So the first piece of personal advice you provide to each after the divorce is complete (e.g. a review of cover), should be treated as initial advice, which will require a SoA.  Remember that Des and Denise may have a new partner to insure, and there may be e.g. step-children to consider.

This can’t be done with a RoA – recall the 3 conditions that must be met for ongoing (RoA) advice (Tutorial 3)

  1. How should you handle the automatic annual renewals that have occurred during and after the divorce?

The automatic renewal of an insurance product is a contractual arrangement between each individual and the insurer.  There should be nothing to handle if no advice is provided.  However, it may be the case that one party to the former marriage is paying for the policies of both, and wants to change that arrangement.  Provided that each party owns their own policies, it should be a matter of altering the direct debit or credit card, something which clients should be able to do online with the insurer.  Also, if the adviser hasn’t seen the client in a while it may be appropriate to re-disclose the commissions being paid.

 Question 33

SCENARIO

An adviser stores confidential client personal information in a cloud facility operated by an offshore provider.  The account is hacked and the hacker accesses a retired client’s email and illegally accesses the client’s private account details for his SMSF bank account.

The adviser receives an email from his overseas client (via hacked email account) requesting that he sell down $550,000 of his SMSF investments and transfer the money to an overseas bank account nominated in the email.

Shortly after the transfer is complete, the client phones the adviser and tells him that $550,000 has disappeared from his SMSF.

Questions

  1. Who is responsible?

The adviser – any outsourced offshore service provider must comply with the Australian Privacy Principles (Australian Privacy Principle 8—cross‑border disclosure of personal information).  APP8 requires an APP entity to ensure that an overseas recipient will handle an individual’s personal information in accordance with the APPs, and makes the APP entity accountable if the overseas recipient mishandles the information

  1. Which standard has been breached?

Standard 2 – para 35 – “you must keep confidential all information about the client that you are given or obtain in connection with you or your principal acting for the client.”

  1. How should the adviser go about reporting this?

This is a Notifiable Data Breach (NDB) involving personal information. The 3 NDB conditions for OAIC notification have been met:

  • Unauthorised access
  • Resulted in serious harm
  • Unable to prevent serious with remedial action

This refers to APP11 – Security of Personal Information.  The adviser must also notify the Office of the Australian Information Commissioner.

  1. Besides reporting this, what other actions should the adviser take?

Four (4) actions are required following a data breach

  • Contain the data breach to prevent any further compromise of personal information.
  • Assess the data breach by gathering the facts and evaluating the risks, including potential harm to affected individuals and, where possible, taking action to remediate any risk of harm.
  • Notify individuals and the Commissioner if required. If the breach is an ‘eligible data breach’ under the NDB scheme, it may be mandatory for the entity to notify.
  • Review the incident and consider what actions can be taken to prevent future breaches.
  1. What could the adviser done to prevent the disappearance of the client’s money?
  • Call the client to check that the request was actually made by the client
  • Confirmed that the offshore bank account was owned by the client

Question 34

In regard to delivering a FSG to a client or prospective client, determine whether the following statements are TRUE or FALSE.

A. Publishing an FSG digitally and notifying the client that the disclosure is available is fine, regardless of whether the client is first given the opportunity to opt out of this method of delivery TRUE or FALSE  (RG175.137(d))

B. An FSG does not have to be provided if the financial service is general advice provided in a public forum but certain information must be provided to the client before the advice is provided. TRUE or FALSE  (RG175.106(d))

That information is:

  • Providing entity name & contact details
  • Authorising licensee(s) & statement that AR is authorised by licensee(s)
  • Remuneration & benefits received including by related parties
  • Association / relationships capable of influencing the advice

C. An FSG does not need to be given to a client if the client has already received an FSG provided that the information remains unchanged. TRUE or FALSE  (RG175.107)

D. Failure to provide an FSG in a setting (e.g. a social setting) that is not in a meeting and is not a telephone call is unlikely to contravene the Corporations Act where it becomes apparent that general advice is likely to be provided to a retail client and the providing entity then asks the client for their postal or electronic address and the client refuses to provide their address to the providing entity. TRUE or FALSE  (RG175.108)

E. Where the need to provide an FSG becomes apparent during a telephone call with a prospective client, the providing entity must tell the client that a Financial Services Guide exists and that the provider will send out a Financial Services Guide on request. TRUE or FALSE  (Reg 7.7.02(4) &(4A))

F. An FSG must be provided if it becomes apparent that the financial service relates to a basic deposit product including an interest in a cash management trust. TRUE or FALSE (RG175.106(c))

Question 35

SCENARIO

You are a risk insurance adviser.  A client named Dave comes to you for advice regarding income protection.  You do all the right things including FSG, fact find, standard health questionnaire; plus a ‘needs analysis’ and you research three products and provide an insurer’s quote for each.

You recommend a suitable income protection product and highlight Dave’s need for additional Life & TPD insurance.   As part of your normal process, you explain to Dave in detail his Duty of Disclosure to the insurance company (i.e. he must disclose all medical information he knows or would be reasonably expected to know) and the consequences of any non-disclosure.

You arrange for Dave to undergo a health interview directly with the insurer, where the insurer explains Dave’s Duty of Disclosure to the insurer and asks a series of detailed questions about the client’s current and past health.

The insurer has not yet accepted Dave’s application but is expected to do so shortly at standard rate pricing (i.e. no price loading and no excluded medical conditions) as per their original quote.

A few days later, another client named Ted comes in seeking income protection advice.  He tells you that he and Dave are work colleagues and he states that he wants the same inexpensive policy as the one Dave got because he needs a regular income.  Ted also discloses that both he and Dave work in a warehouse and both need to take time off from time to time due to ongoing back problems.

You realise that it is likely that Dave has not disclosed a back problem history to the insurer.

QUESTIONS

Q1. What is the first thing you should do?

a) Contact Dave and discuss this with him. If true, remind him of his ongoing duty of disclosure and the consequences of not doing so; strongly encouraging him to make immediate full and truthful disclosure to the insurer

b) Contact the insurer and tell them of Dave’s non-disclosure

c) Make a file note in Dave’s file regarding the conversation with Ted, in the event that you are questioned later about the issue

d) Do nothing

You, the adviser have come into possession of this information via a 3rd party; not from the client.  The duty of disclosure rests with Dave as the party to the insurance contract.  If you contact the insurer directly without Dave’s permission you could very well breach Dave’s privacy, or if the alleged back problem turns out to be untrue, you could be creating an unwanted problem for Dave with the insurer; and for yourself if you make an untrue statement to the insurer.

Q2. Name two (2) things that could prove to be a problem with Dave’s policy if he has not disclosed his back problem?

Answer

  1. Dave does not have a policy that is fit for purpose as it will not protect him as he hopes and consequently allowing Dave to proceed with the policy in this form will not be in his best interests at claim time. This is because the insurer is not aware of all the risks it faces in regards to Dave’s health status. It cannot issue a policy that is tailored to Dave’s personal circumstances
  2. Dave’s non-disclosure is likely to affect the payout in the event that Dave makes a claim and it can lead to the insurer potentially voiding the policy and refunding all premiums as though the policy never existed. It is imperative to advise Dave that the broad effects of acting on an income protection policy obtained by misrepresentation or fraud will potentially have serious adverse effects on his financial future in the event of a claim.

When the insurer accepts Dave’s application, Dave effectively enters into a contract of insurance with the insurer.  Up until that time, Dave has an ongoing duty of disclosure.  Even after that time, Dave has an obligation to the extent that he has previously withheld relevant information.  Therefore the duty of disclosure is Dave’s responsibility and the consequences of non-disclosure can be serious. Two things that are likely to be wrong with Dave’s policy involve the consequences:

 

Q3. Name two things that should concern you as the adviser about Ted’s intentions to acquire the same policy at the same price as Dave.

Answer

  • It is of concern that Ted seems to think that for a small premium payment, he is acquiring a means to receive a regular income while he is off work with back problems. That could be the case if he had no history of back problems; but not with a pre-existing back condition.
  • It appears that he does not understand how income protection is priced. An income protection policy is not a one-size-fits all financial product as he seems to think. Income protection policy pricing varies with gender, age, smoking status, health status, income level and work characteristics. Ted’s personal circumstances will be different to those of Dave.

Q4. What is the least likely action you would take?

a) Research alternative products taking into account Ted’s back problem

b) Explain the likely consequences of Ted’s back problem on his insurability

c) Provide Ted with income protection with no exclusion related to his back problem

d) Advise Ted that you now have a conflict of interest and refer him to another adviser

Question 36

Define a tax (financial) advice service?

Answer

A tax (financial) advice service is tax agent service (excluding representations to the Commissioner, i.e. doing tax returns), provided by a financial services licensee or a representative, in the course of advice usually given by a licensee or representative, and relates to ascertaining or advising about obligations under a taxation law, and there is reliance for tax purposes.

Question 37

The Financial Planners and Advisers Code of Ethics 2019 is which of the following?

a) A legislative code

b) A principles based code (I found this answer on the FASEA website)

c) A professional conduct code

d) An industry code

Question 38

An adviser issues a Statement of Advice to a client with the following disclosures:

  1. The adviser is the director of a licensee company that is a party to binder with a risk insurance company
  2. An ongoing fee being 0.66% of the $550,000 assets under management
  3. An upfront risk insurance commission of $2,800 of which 50% is rebated to the client
  4. A commission of $2,200 of which 100% is rebated to the client

Which one of the above disclosures is consistent with the adviser being able to use the restricted term ‘unbiased’ advice?

Answer:

Option 4. is the correct answer

Option 1. is reasonably capable of creating a conflict in terms of insurance product advice and an independent practice must operate free from conflicts. See RG175.64(c)

Options 2. and 3. also contravene the restricted terms definition in RG175.64(a)

Question 39

A licensee company trading as Unbiased Advice R Us has two directors, Ted and Jane.  Both are authorised to provide personal advice to retail clients.  Neither receives any commissions, volume-based payments, nor other gifts or benefits.

Unbiased Advice R Us Pty Ltd subsequently authorises two new representatives Alice and Bob.  Alice and Bob both receive % based asset fees and commissions. All four advice providers operate free from any APL product restrictions.

Are the following statements TRUE or FALSE?

  1. Alice and Bob cannot use the term ‘unbiased’ because they receive commissions. TRUE / FALSE
  2. Ted and Jane can continue to use the term ‘unbiased’ because they don’t receive commissions, volume-based payments, or other gifts or benefits TRUE / FALSE
  3. The licensee company’s trading name can no longer include the term ‘unbiased’ TRUE / FALSE

See RG175.67 Example 1.  Also note that %-based fees are not considered to be volume based remuneration RG175.74-75

Question 40

  • A licensee company, called ‘Non-aligned Boutique Advice’ provides personal advice to retail clients. The company receives commissions and % based asset fees.

Which of the following names is most likely to be acceptable under s923A?

  1. Non-aligned Boutique Advice
  2. Locally-owned Boutique Advice
  3. Privately-owned Impartial Advice
  4. Locally-owned Unbiased Advice
  • The licensee company now changes its remuneration policy and meets all of the conditions necessary to be able to call itself an ‘independent’ advice practice. The company employs and authorises an advice provider.
  1. Can the new employee / advice provider accept an occasional gift valued at less than $300 from a product provider? YES or NO
  2. Can the advice provider’s employer accept an occasional gift valued at less than $30? YES or NO

See s923A2b(1) for gifts to employers.  Also note that the value of the gift is not the issue.  The issue is whether it is reasonably be expected to influence that person

Question 41

AFS Licensee Company, Go-getter Pty Ltd purchases a book of business from another AFS Licensee Good Advice Pty Ltd.  At the completion of the sale, Good Advice Pty Ltd voluntarily ceases it AFS Licence and proceeds to shut the company down.

Questions

1. Because the sale proceeds received by Good Advice Pty Ltd come from a 3rd party, it is caught under the conflicted remuneration rules. TRUE or FALSE see RG246 Appendix 1 top p68

2. Under the record keeping rules, Good Advice Pty Ltd must keep client records for 7 years or until the Licensee ceases trading, whichever comes sooner. TRUE or FALSE see RG175.220

3. As it reviews its newly acquired clients, what is the first thing Go-getter Pty Ltd must do? Provide a ‘Go-getter’ FSG to all clients so that they can make an informed decision whether to continue to receive advice from Go-Getter

4. Because most of Go-getter’s newly acquired clients have received a Statement of Advice in the last three years, a Record of Advice can be issued at the first review for ongoing advice. TRUE or FALSE  The conditions for further advice are set out in RG175.180

Q. New AFS Licensee, Go-getter Pty Ltd discovers that a group of 50 clients who have been charged ongoing fees for the past 5 years but no fee disclosure statements or renewal notice has ever been issued. These clients are being charged an annual fee of 2% of funds under management ($550,000) for the following reasons:

  • To be on the books of Good Advice Pty Ltd
  • An entitlement to make 2 telephone calls a year if they needed to ask a question
  • An entitlement to an annual review which they would pay full price for (ultimately none of the 50 clients were reviewed or offered a review in the past 10 years)

In regards to the ongoing fees being charged:

Q1. What was Good Advice Pty Ltd’s legal obligation to these clients?

All AFS licensees have an obligation to ensure that their financial services are provided efficiently, honestly and fairly: s912A(1)(a) of the Corporations Act 2001 (Corporations Act).

Q2. Which ethical standard is most relevant?

Standard 7 – which states (among other things) … all fees and charges payable to you or your principal, and benefits you or your principal receive, for acting for the client are fair and reasonable, and represent value for money for your client.

Q3. Which value is the most relevant?

Value of honesty – it was unfair that the clients were made to subscribe to these ongoing terms and conditions, even though some may have seen some value in paying the ongoing asset based fee for perceived access to financial advice.  So far, this is likely to breach the value of fairness until up until the time where the clients did not receive what they paid for which was the right to an annual review.  In my view, this tips it into the value of honesty.

Q4. What two (2) actions should Go-Getter Pty Ltd take to remedy this situation?

  1. Cease the fees immediately and review the clients
  2. Report to ASIC a significant breach of s912A within 10 business days of becoming aware. It is likely to be a systemic breach due to the large number of affected clients.

RG 256.41 Where appropriate, offer assistance to clients who wish to seek their own professional advice to assist their response to the review and remediation conducted.

Good advice Pty Ltd will remain responsible for the advice provided to these clients and the terms under which it was provided.  Ultimately, it will be the director(s) of Good Advice Pty Ltd that will be ultimately forced by ASIC to undertake client remediation.

See RG256 – Client review and remediation conducted by advice licensees

Question 42

Stark Advice Pty Ltd holds an AFS Licence.  The company’s sole director Herman Stark is authorised to provide advice to retail clients.  Mr Stark is also the subject of a client complaint to AFCA.  Although he defended the complaint, AFCA issued a determination against him which involved a significant amount of money to be paid to the client by way of remediation for inappropriate superannuation investment advice.  The complainant has accepted the determination and Mr Stark has refused to pay within the prescribed time limit.

Questions

  • What is the prescribed time limit for Mr Stark to pay if the complainant accepts the AFCA determination? 30 days
  • What is the general claim limit for complaints to AFCA? $1.085 Million
  • Apart from general insurance and uninsured motor vehicle claims, what is the compensation claim limit (on or after 1 Jan 2021) in most claims of direct financial loss, except for superannuation? $542,500
  • What is the monetary restriction on AFCA’s jurisdiction for Question 3 above? $1.085 Million
  • What is the AFCA compensation cap for a superannuation complaint? Unlimited

Reference: AFCA Rules (PDF) – note definition of eligible person on p44

Which of the following statements about AFCA is incorrect?

  1. All of AFCA’s cost will be borne by the licensee
  2. A determination made by AFCA is only binding on the licensee. If a complainant does not like AFCA’s finding, they can just ignore it and go to court anyway
  3. The obligation to be a member of AFCA is triggered by providing services to retail clients
  4. AFCA limits its service to retail clients only

Reference: AFCA Rules (PDF) – note definition of eligible person on p44

Reference: https://albrechtburrows.com.au/articles/not-a-level-playing-field

Q. What is likely to happen to Mr Stark for not complying with the AFCA determination?

  • Failure to pay will result in cancellation of Mr Stark’s AFCA membership
  • Because Mr Stark provides advice to retail clients, it is mandatory under s912A(2)(c) to be a member of AFCA
  • For the breach of his s912A licensee obligations and in particular, failing to be a member of AFCA, ASIC has the power to suspend or cancel Mr Stark’s AFS Licence