TEST YOUR KNOWLEDGE 88 ANSWERS

ANSWERS to “TEST YOUR KNOWLEDGE”

Question 1.

Answer 4 – All of the above

 Question 2.

TRUE – refer to RG 175.106(a)

Question 3. 

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

Question 4.

FALSE refer to RG 175.228

 Question 5.

TRUE – refer to RG 175.388

This just means that as an adviser attempts to justify a product switch to a client by demonstrating the potential cost savings of making the switch, the adviser’s own fee must be included in the calculation if the fee is dependent on the switch occurring.  If a fee comes directly from the client for the adviser to provide a service (regardless of product outcome), this is not an issue and doesn’t need to be included in the cost saving.  This is only likely to happen where fees and commissions come from a third party e.g. life insurance commissions, a fee paid from a person’s superannuation account.  It is designed to be a disincentive for advisers to needlessly recommend product switches for their own financial benefit.

Question 6.

Answer 3 – Scaled advice can be simpler but CANNOT be of lower quality where the subject matter is not complex (RG244.74 – RG244.76 and also read RG175.422 – RG175.426)

Question 7.

FALSE – refer to RG 175.349

Question 8.

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

 Question 9.

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

 Question 10.

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

 Question 11.

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

Question 12.

FALSE – there are not two sets of rules (RG 175.424)

Question 13.

Answer 4 – Information CAN BE incorporated by reference into the SoA provided that the document containing the information has already been given to the client and the SOA states that a copy of the information may be obtained from the providing entity on request, at no charge (s952(b) & RG175.190)

 Question 14.

Answers

Commentary:

This case study follows RG175 Example 22 (page 102): Over-servicing a client when advising on an SMSF

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

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

No – In this situation, the advice provider has not complied with the best interests duty (s961B) and has breached s961J (i.e. conflict between client’s interests and those of provider, licensee, authorised representative or associates) because the advice provider has given priority to maximising adviser remuneration over the interests of the client.  Refer to RG175.413 (conflicts priority rule)

Also refer to RG175.375.  The advice is not fit for purpose and given the client’s relevant circumstances, the clients are unlikely to be in a better position if they follow the advice

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Standard 9 requires that

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

Question 15.

1. Standard 6

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

3. You probably haven’t satisfied the s961B safe harbour.  It is hard to argue that Bob’s dementia doesn’t form part of Mary & Bob’s relevant circumstances (s961B (2) (b) (ii)). Also read ‘Scope of the advice’ RG 175.292 – RG175.294.

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

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

Question 16.

Standard 2 paragraph 35 states that “you must treat all clients fairly, as between themselves. You should provide professional services to all clients, managing your business so that each client has a fair share of your attention, skills and time.” The purpose of this question is to bring it to your attention.  Note that there is another example of the application of Para 35 in CASE STUDY D of the Explanatory Statement – the Tom (provisional provider) and Sarah (supervising provider) example.

Question 17.

Answer 4 – RG 175.265 “We are more likely to take the view that processes for complying with the best interests duty are not effective, and that the best interests duty in s961B(1) is not being complied with, if an advice model typically leads to a one-size-fits-all outcome.”

Question 18

Answer 4. $0 (she fails the work test required for members aged 65 or more to make a contribution)

Please note: This question appeared in an adviser exam in late 2019 / early 2020.  From 1 July 2020, a change in legislation has allowed making contributions to super easier for anyone aged 65 or 66 years of age as there now is no requirement to meet the work test. But once an individual reaches 67 years of age, the work test must be met prior to the contribution being made.

Question 19

Answer 9. private trust (RG 121.20)

Question 20

Which of the following is NOT considered to be a financial service?

Answer (b) – Factual information where no opinion or recommendation is expressed (RG121.24)

Question 21

Answer (a) – Inducement to deal (Corporations Act s1041F)

Question 22

No – Referral selling – The Australian Consumer Law makes it illegal for a business to persuade a consumer to buy goods or services by promising benefits if they help the business supply goods or services to other customers.

Question 23

TRUE

TRUE

FALSE (See standard 3 para 38 case 3 – i.e. the statement “George does not have a conflict of interest and the benefits both George and Elaine get do not flow from the referral but from providing the advice to Newman” and para 39 – i.e. client disclosure and consent will not relieve you of the duty to comply with this Standard)

Question 24

No.  It is Third line Forcing

Question 25

All of the above

Question 26

Answer 3. Ignoring the conflict

Question 27

Barry has breached Code Item 10

Two actions Barry could have taken are:

1. Refer Len to another appropriately skilled tax (financial) adviser, registered tax agent or legal practitioner
2. Decline to provide the advice to Len
3. Barry could defer to his licensee for assistance

REF: TPB Information Sheet TPB(I) 29/2016 – Code of Professional Conduct – Reasonable care to ensure taxation laws are applied correctly for tax (financial) advisers.  https://www.tpb.gov.au/reasonable-care-ensure-taxation-laws-are-applied-correctly-tax-financial-advisers-tpbi-292016

Question 28

TRUE

TRUE

TRUE REF: TPB Information Sheet TPB(I) 30/2016 – Code of Professional Conduct – Having adequate arrangements for managing conflicts of interest for tax (financial) advisers  https://www.tpb.gov.au/tpbi-302016-managing-conflicts-of-interest-tax-financial-advisers

Question 29

Karen is seeking advice on improving the performance of her superannuation fund. Her adviser is Margaret, an authorised representative of Super Duper Financial Planning Pty Ltd.

Margaret advises Karen to roll over her superannuation benefits from her current industry fund to a new retail fund.  Margaret and her licensee (Super Duper Financial Planning Pty Ltd) will receive a benefit from the retail fund provider when the rollover is implemented.

In preparing her advice, Margaret does not attempt to compare the investment asset allocation or likely returns in her existing industry fund with those in the recommended retail fund.  Also, she does not address the increased ongoing fees that Karen will have to pay in the replacement retail fund.

Margaret has failed to demonstrate, realise or promote the values of … Competence and Diligence

Margaret has breached Standard 2 for the following reasons:

1. Her advice was not in Karen’s best interests
2. She failed to act with integrity when providing advice to Karen
3. She failed to conduct a reasonable investigation of existing and potential financial products
4. She did not base her judgments on the client’s relevant circumstances

Two other standards that have been breached are

Standard 3—as Margaret received a benefit from the implementation of her advice to switch to the retail fund

Standard 10—Margaret’s failure to consider relevant issues (Karen’s likely returns, and ongoing fees) does not demonstrate competence

Standard 9 – Margaret did not act in good faith in her product recommendation, nor did she offer product advice ‘with competence’

REF: Financial Planners and Advisers Code of Ethics 2019 Explanatory Statement – Appendix: Case studies, Case Study A

Question 30

TRUE REF: Standard 2, Financial Planners and Advisers Code of Ethics 2019 Explanatory Statement, Para 32 & 33

Question 31

Additional actions restraints or behaviours that are expressly required by the Code of Ethics standards, which are not specifically mentioned in the Corporations Act include (Read the Explanatory Statement -not an exhaustive list):

1. Must act with integrity (Std 2)
2. Must not act in the event of a conflict of interest and must not receive benefits for referrals, only for provision of advice (Std 3)
3. Despite a s961H warning, you are never relieved of the duty to gather sufficient information for complete relevant circumstances (Std 2)
4. You should take into account your client’s express wishes but these do not override your duty to give advice that is in the client’s best interests (Std 2)
5. Take into account the broader, long-term interests and likely circumstances of your client, and take into account the broad effects of the client acting on your advice which are not limited to effects on the client (Std 6)
6. Must satisfy yourself that the client understands your advice (Std 5)
7. consider whether your product recommendations should be limited to “ethical” or “responsible” investments (Std 6)
8. Should provide professional services to all clients, managing your business so that each client has a fair share of your attention, skills and time (Std 2)
9. all fees and charges payable for acting for the client must be fair and reasonable, and represent value for money for your client. (Std 7)

Question 32

Standard 3 Financial Planners and Advisers Code of Ethics 2019 states that you must not advise refer or act in any other manner where you have a conflict of interest or duty.  Which two (2) of the following are NOT conflicts of interest?

Answer – 1. A fee or other benefit received directly from the client

Answer – 4. A commission received in relation to a risk insurance product

Question 33

The two (2) primary aims of the conflicted remuneration provisions are:

1. to more closely align the interests of those who provide advice with the interests of their clients, and
2. to improve the quality of advice these clients receive

RG 246.1

Question 34

TRUE

TRUE

FALSE

TRUE

TRUE

Question 35

Two actions a financial planner can take to make risk profiling less challenging and more meaningful are:

• Understand and be sensitive to the role of language in professional/client interactions
• Planners can address potential difficulties relatively easily in advance of holding their consultations if they are aware of them
• Allocate more client time to the risk profiling process to help their understanding

REF: https://fpa.com.au/wp-content/uploads/2018/03/Financial-Planning-Research-Journal-V4-ISS1-2018.pdf

Question 36

Answer 3 – Emotional judgement

Question 37

Answer 1 – Emotions

REF: https://ethicsunwrapped.utexas.edu/glossary/moral-reasoning

Question 38

All of the Above

REF: Financial Planning Research Journal, Volume 2 – Issue 1 2016 • Characteristics of Trust in Personal Financial Planning, Michelle Cull, Terry Sloan – https://fpa.com.au/wp-content/uploads/2016/08/financial-planning-research-journal-v2-iss1.pdf

Question 39

All of the above

REF: How financial literacy and demographic variables relate to behavioural biases – https://www.emerald.com/insight/content/doi/10.1108/MF-01-2018-0003/full/html?skipTracking=true

Question 40

Answer (b) The free rider approach

Question 41

TRUE

Question 42

TRUE

FALSE

TRUE

How to Use the Choices Test – https://www.scu.edu/ethics/ethics-resources/ethical-decision-making/

Question 43

Robert should

1. Robert should immediately report his findings to his licensee, Australia Wide Financial Pty Ltd who in turn should submit a Suspicious Matter Report (SMR) to Austrac within 3 business days
2. If the licensee takes no action, Robert should immediately report the matter directly to Austrac via a SMR

It is against the law to tell the customer or anyone else that you have formed a suspicion or submitted an SMR to AUSTRAC.

https://www.austrac.gov.au/business/how-comply-guidance-and-resources/reporting/suspicious-matter-reports-smr

Question 44

Welfare fraud

Financial planners told AUSTRAC that they often informed customers of the need to declare income and change of circumstances to Centrelink; however, financial planners are reminded that suspected welfare fraud by their customers – as an offence against a law of the Commonwealth – should be reported in an SMR to AUSTRAC.

https://www.austrac.gov.au/business/how-comply-guidance-and-resources/guidance-resources/australias-financial-planning-sector-money-laundering-and-terrorism-financing-risk-assessment (Criminal Threat Environment section)

Question 45

FALSE

Wholesale clients

Financial planners are required to submit SMRs with respect to wholesale clients. Although the Corporations Act 2001 differentiates between wholesale and retail investors, the AML/CTF Act does not. This means that for wholesale clients, there is a requirement to undertake customer due diligence as outlined in the Purpose section of this assessment.

https://www.austrac.gov.au/business/how-comply-guidance-and-resources/guidance-resources/australias-financial-planning-sector-money-laundering-and-terrorism-financing-risk-assessment (Criminal Threat Environment section)

Question 46

PART A

1. Assess the non-concessional contribution cap rules, including bring forward rules

2. Assess if there are any other non-concessional contributions in the same financial year from any of the following sources,

For example

• contributions you make, or your employer makes on your behalf, from your after-tax income
• contributions your spouse makes to your super fund (unless your spouse makes the contributions because they’re your employer)
• personal contributions not claimed as an income tax deduction
• excess concessional (before-tax) contributions you have not elected to release from your super fund
• contributions over your capital gains tax (CGT) cap amount
• retirement benefits you withdraw from your super fund and ‘re-contribute’ to super
• most transfers from foreign super funds (including New Zealand KiwiSaver contributions), but excluding amounts included in your fund’s assessable income.

3. Ensure that the superannuation fund can accept a non-concessional contribution

4. Ensure that the contribution does not exceed the $1.6M transfer balance cap

5. Ensure that any insurance premiums deducted would not erode the non-concessional tax-free component of Michael’s super

6. When and how Michael can access his super and which would be most tax advantageous

PART B

In regards to the conflict of interest, what is Renato’s obligation under the TPB Code of Professional conduct (choose one)?

1. To identify that he has a conflict of interest in receiving a referral fee and to control the conflict
2. To identify and disclose his conflict to Michael by advising him that he will receive a financial incentive if he engages the services of Mohammed
3. To personally provide the tax advice to Michael as a registered tax financial) adviser
4. To disclose his conflict of interest to Michael and if Michael so wishes, refer him to another suitably qualified tax adviser without the receipt of a referral fee or any other benefit

In regards to the conflict of interest, what is Renato’s obligation under the FASEA Code of Conduct?  Is it?

1. To identify that he has a conflict of interest in receiving a referral fee and to control the conflict
2. To identify and disclose his conflict to Michael by advising him that he will receive a financial incentive if he engages the services of Mohammed
3. To personally provide the tax advice to Michael as a registered tax financial) adviser even though he does not have the necessary tax knowledge
4. Renato must not act on the conflicted referral. He must disclose his conflict of interest to Michael and if Michael so wishes, refer him to another suitably qualified tax adviser without the receipt of a referral fee or any other benefit

Question 47

1. When I visit a financial planner, I don’t want to be sold to
2. I know my financial planner is listening to me because he doesn’t interrupt when I speak
3. What I value most about my financial planner is honesty and transparency
4. I feel that my financial planner was acting in my best interests because he took control and told me what is best for me

Question 48

1. In regard to using objectivity as tool for improving the decision-making, the biggest culprit for making irrational decisions consists of biased perceptions and wrongly calculated outcomes. TRUE or FALSE
2. Your memory is a better asset to improved decision making rather than open emotion-free assessment TRUE or FALSE

(Don’t rely on your memory.  Don’t let anything interfere with open, emotion-free decision making. Many individuals are still guided by the feeling that memory is a great asset in the journey of becoming a flawless leader or manager. The past is the past, in fact, past events can only direct you to a place where you wouldn’t want to be at the present moment.)

3. Judgment and decision making depend heavily on situation-specific factors such as how much time a decision maker has available and what mood the decision maker is in. TRUE or FALSE
4. Because judgments are so easily influenced by question wording and framing, the safest course of action is to elicit them in a variety of ways and compare the results. TRUE or FALSE
5. The inclusion of a middle category encourages people to choose that category TRUE or FALSE

Question 49

What are two (2) possible strategies that Roger could discuss with Bob to maximise his fortnightly age pension payments on the basis of the assets test?

(Not an exhaustive list)

1. Bob can pay down debt from existing assessable resources. By paying off the home loan or any other personal debt, the value of assessable assets will be reduced and hence boost the rate of pension.
2. The legislation around lifetime annuities has just changed on the 1^stof July 2019. For example, a $100,000 investment into a lifetime annuity will only count as a $60,000 asset immediately due to a 60% assessable value.  At the annuitant’s life expectancy or 5 years – whatever comes last, the annuity assessable value will only be 30% of the purchase price.
3. Take advantage of the younger spouse – superannuation in the accumulation phase is ‘quarantined’ from Centrelink assessment until Age Pension age provided that no income stream is being paid from it. By utilising the non-concessional contribution ‘bring forward provisions’ Bob can freely access his own super and can contribute up to $300,000 into his spouse Anna’s superannuation account. Moving money from his assessable environment into his younger spouses exempt super account can increase Bob’s Age Pension
4. Bob can pre-pay your funeral or purchase a funeral bond
5. Bob can consider gifting – Centrelink allows gifting (giving away money or assets) up to $10,000 per financial year and a maximum of $30,000 over a 5-year rolling period.

Question 50

1. Has Wendy breached the conflicted remuneration provisions of the Corporations Act? YES or NO

RG246.191 – There is a general ban on asset-based fees on borrowed amounts. See s964D and 964E.

2. How could Wendy better structure her advice remuneration on Mark’s investment portfolio?

Charge a fixed dollar fee for advice; or charge an asset fee on Mark’s own money only; or a combination of both.

RG 246.201

A client may have a portfolio of products purchased with a combination of borrowed and non-borrowed amounts. In this case, we consider that, to charge an asset-based fee, the net value of the portfolio should be determined, and the amount borrowed (less any amount repaid) should then be deducted from this net value. Asset-based fees should only be charged on the resulting value of the portfolio after borrowed amounts are deducted.

3. Does the FASEA Code of Ethics have anything to say, specifically on the matter of conflicted remuneration? YES or NO?

If so where?

Yes  – Standard 7 Para 56, Explanatory Statement – Part 7.7A Divisions 3 and 4 of the Act includes detailed requirements about remuneration arrangements, including “conflicted remuneration”. The Code does not remove the need to comply with the requirements of these Divisions.

Question 51

Clifford is 72 and wants to leave 2 x residential properties to his granddaughter Katie.  He consults Jeffrey a financial planner.  What should Jeffrey take into consideration in advising Clifford?

This is not an exhaustive list. You may have more considerations:

1. Katie’s age; whether she is an adult or minor
2. Whether Clifford has a current will and if so, the current executor and beneficiaries
3. The CGT position of the properties; what cost base Katie will inherit which depends on the date of purchase by Clifford

Question 52

Gloria, a financial planner, provides comprehensive financial advice to Alfred who is in receipt of a full age pension.  Gloria later discovers that Alfred owns three residential properties which he failed to mention during the fact find interview.

Is Gloria under any statutory obligation to report Alfred for welfare fraud?  Yes / No

If Gloria decides to report Alfred, how should she go about it? By means of a Suspicious Matter Report to Austrac;

(Reference Page 16 (Welfare Fraud) AUSTRALIA’S FINANCIAL PLANNING SECTOR >>> MONEY LAUNDERING AND TERRORISM FINANCING RISK ASSESSMENT)

Question 53

1. A Paraplanner must meet the RG146 training standards if he or she performs tasks that are directly related to the provision of financial product advice.  TRUE FALSE
2. An Australian Financial Services Licensee is responsible for the misdeeds of a Paraplanner who is not a RG146 compliant? TRUE FALSE

See RG146.27 & RG146.28

Para-planners and trainee advisers do not have to comply with the RG146 training standards but must be adequately supervised and be competent to do the job RG146.27

RG146.28  licensees must ensure that their paraplanners and trainee advisers have the necessary competence to perform their functions: see s912A(1)(f).

Question 54

A financial adviser has been sent a confidential and sensitive medical report by his client’s doctor for life insurance purposes.  The doctor was properly authorised in writing by the client to release the report directly to the adviser.

However, the financial adviser leaves it on his desk overnight and the medical report is seen by the cleaner.  As fate would have it, the cleaner knows the client and is now privy to the confidential and sensitive information contained in the medical report.

The client’s privacy has been breached. TRUE FALSE

The Australian Privacy Principles will be satisfied if the adviser seals the medical report in an envelope and sends it back to the client immediately by overnight courier.  TRUE FALSE

The financial adviser must notify the client of the data breach (not simply return the document) but may also have to notify the OIAC as a Notifiable Data Breach (NDB) if the breach meets the three (3) conditions for an eligible data breach

What actions should the financial adviser take?

This is a data breach.  Generally, the actions taken following a data breach should follow four key steps:

• 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.

In determining whether a data breach is an Eligible Data Breach (and therefore reportable), three (3) conditions must be met.

An eligible data breach arises when the following three criteria are satisfied:

1. there is unauthorised access to or unauthorised disclosure of personal information, or a loss of personal information, that an entity holds
2. this is likely to result in serious harm to one or more individuals; and
3. the entity has not been able to prevent the likely risk of serious harm with remedial action

In the scenario above, there has been unauthorised disclosure; it is likely to cause harm (humiliation) and the financial adviser is unlikely to be able to mitigate the harm with remedial action (i.e. the cleaner can’t un-see the document).

Question 55

In regard to the TPB Code of Professional Conduct

Code Item 6

“Unless you have a legal duty to do so, you must not disclose any information relating to a client’s affairs to a third party without your client’s permission.”

In relation to Code Item 6, TPB Code of Professional Conduct, which one of the following key differences between the confidentiality requirements of TPB Code compared to the Privacy laws is UNTRUE?

• Under TPB Code Item 6, all client information relating to a client’s affairs is affected, not just personal information, as is the case with the Privacy Act
• Under TPB Code Item 6, it is only necessary that the information relates to the affairs of a client. The information does not have to belong to the client, or have been directly provided by the client to the tax (financial) adviser.
• Tax (financial) advisers can simply notify clients about how their personal information will be used
• Client consent must be positive.  Tax (financial) advisers can’t simply notify clients about how their personal information will be used. Clients must take a positive step to authorise the disclosure of their information

TPB reference: TPB(I) 32/2017 Code of Professional Conduct – Confidentiality of client information for tax (financial) advisers

Question 56

A client wants advice on investing $12,000.  What disclosure documentation does an adviser need to prepare?

1. Statement of (personal) advice
2. Statement of transaction
3. Statement of (general) advice
4. Record of advice

Reference RG175.176 (e)

Question 57

In regard to the TPB Code of Professional Conduct

Code Item 5

“You must have in place adequate arrangements for the management of conflicts of interest that may arise in relation to the activities that you undertake in the capacity of a registered tax (financial) adviser.”

In relation to Code Item 5, TPB Code of Professional Conduct, which one of the following key differences between the conflicts of interests requirements of TPB Code compared to the Corporations Act is UNTRUE?

1. Code Item 5 includes both actual and potential conflicts whereas the Corporations Act addresses actual conflicts only
2. Code Item 5 is broader and requires that arrangements must be in place to avoid, control and/or disclose actual or potential conflicts whereas the Corporations Act merely requires that the client’s interests be prioritised (albeit supported by the s961 best interests duty and s912A (1) licensees must have in place adequate arrangements for the management of conflicts of interest)
3. Code Item 5 applies broadly to the personal and professional conduct of all registered tax practitioners (in relation to the activities that a practitioner undertakes in their capacity as a tax practitioner), while the best interests duty/conflicts priority rule under the Corporations Act only applies to those providing personal advice to retail clients.
4. Code Item 5 requires that if a tax (financial) adviser has a conflict of interest or duty, he or she must disclose the conflict to the client and must not act.  If the client wishes, the tax (financial) adviser may refer the client to another relevant provider if neither the adviser nor their principal will receive any benefits from the referral.

Option (4) refers to an adviser’s obligation under Standard 3 of the Financial Planners and Advisers Code of Ethics 2019.  See para 37 Explanatory Statement.

TPB reference: TPB(I) 30/2016 Code of Professional Conduct – Having adequate arrangements for managing conflicts of interest for tax (financial) advisers

Question 58

A client wants urgent advice on investing $12,000 and the advice is provided over the telephone.   What documentation does an adviser need to give to the client within 5 days?

1. Statement of advice
2. Statement of transaction
3. Financial Services Guide
4. Record of advice

Providing advice on investing an amount under $15,000 falls under an exception to the SoA rules.

See RG175.176 (e) ….. “relates to financial investments whose value does not exceed $15,000 (s946AA and reg 7.7.09A). Note: This exemption does not generally apply to advice about derivatives, general insurance products or life insurance products. When relying on this exemption, the providing entity must keep a record of the advice provided: s946AA(4) and reg 7.7.08C. This record of advice (including the information about potential conflicts of interest mentioned in s947B(2)(d) and 947B(2)(e), or s947C(2)(e) and 947C(2)(f)) must be given to the client: s946AA(5).”

Also see the rules that apply to further advice at RG175.170 – RG175.172

However, as a time-critical transaction, the adviser is able to provide the advice ahead providing the FSG but it must be sent no later than 5 days after the advice is provided see Delayed provision of FSGs in time-critical cases at RG 175.100 – RG175.103

Question 59

If an Australian Financial Services Licensee is a corporate entity, it is necessary to list all of the directors of the company in the Financial Services Guide.  TRUE or FALSE

See RG175 FSG requirements

 Question 60

Mr & Mrs Farmer, both in their sixties, want to pass ownership of their rural property to their adult son.  The Farmers come to you for advice.  What factors should you consider in advising the Farmers?

These are a few considerations.  You may have more:

• Whether the succession plan should take place while Mr & Mrs Farmer are alive or as a bequest in their will
• The costs of the succession strategy including GCT (a while alive vs (b after death
• If the succession plan is implemented whilst the Farmers are alive, they will need an income stream
• The appropriate ownership structure e.g. inter-vivos trust or testamentary trust
• The possible use of superannuation as part of the succession plan
• Consideration of the needs of any other children the Farmers may have (e.g. asset equalisation strategy)

 Question 61

TechCorp makes available a smartphone application (app) that recommends clients invest in a limited number of model portfolios. The portfolios have been created based on factors such as asset class, the allocation of growth assets, the rates of risk and return and the investment horizon.

TechCorp also provides qualitative commentary on various stocks within the portfolios, including the stock’s performance, dividend yield and suggestions of stocks that are appropriate for a first-time investor.

TechCorp does not ask clients for any personal information. Clients are presented with the four portfolio options and are able to choose which portfolio best suits their needs.

Question A.

Which type of advice is TechCorp providing?

1. Scaled advice
2. General advice
3. Personal advice
4. Factual information

See Example 2 RG255.28

TechCorp is providing general advice and not factual information because the app includes recommendations and statements of opinion that are intended to influence a client in relation to making a decision about a particular financial product or class of financial product.

TechCorp is not, however, providing personal advice because the app does not take into account the client’s relevant circumstances (i.e. their objectives, financial situation or needs).

Question B.

Does TechCorp require a Australian Financial Services Licence?

TechCorp is required to hold a AFS licence as it is providing financial product advice within the meaning set out in RG36.19

Question 62

The Five (5) personality factors are

• Openness
• Conscientiousness
• Extraversion
• Agreeableness
• Neuroticism

Which of the following traits best describes a person who displays an open personality?

1. Always consistent
2. Tends to be generous and trusting
3. Intellectually curious
4. Often careless

Question 63

All personal advice is scaled, or limited in scope, to some extent.  TRUE or FALSE (RG 255.95)

Question 64

In regard to FSG disclosure about remuneration, commission and other benefits, which of the following inclusion statements is INCORRECT?

• Remuneration, commission and other benefits’ should include advice fees payable, commissions (upfront and trailing) received from product issuers and AFS licensees, and ‘soft’ dollar commissions or benefits. (RG 175.115)
• Rather than including specific ranges, rates, comparisons, simple tables and formulas, it is sufficient to include a general statement that a benefit will or may be received and that clients can ask for further details to be provided. (RG 175.120)
• all the information about remuneration, commissions and other benefits should be presented in one place (RG 175.121)
• FSG to include information about the remuneration, commission and other benefits that a person has received or is to receive for referring another person to the AFS licensee or providing entity (RG 175.126)

See individual references above

Question 65

Consider the following statements / conclusions from Daniel Kahneman’s 2012 book, Thinking Fast and Thinking Slow.

A. TRUE (p203)

B. FALSE  (It is an example of outcome bias p208)

C. TRUE (p341)

D. TRUE (p 335)

E. FALSE (pp 109-118)

F. TRUE (p 285, p434)

G. TRUE (p 145)

H. TRUE  (it relates to the planning fallacy; see p249)

Question 66

Identify scenarios and / or actions that are compliant with the letter of the law but non-compliant with the FASEA Code of Ethics.

• Classifying a client as a wholesale client per the letter of the law, who lacks competence in financial matters
• Not clearly communicating and ensuring the client understands whether general advice or personal advice is being / has been provided
• Receiving a referral fee and properly disclosing it in an SoA where the monetising of the referral results in unfair or unreasonable fees, or an advice bias that is not in the client’s best interests
• Referring one party of a divorcing couple to another adviser to avoid a conflict of duty, but by favouring one over the other, not treating both clients fairly as between themselves (Standard 2)
• Recommending that a client retains an existing financial product because it carries a grandfathered commission, while overlooking a product you know would better suit the client’s needs but which doesn’t produce as much adviser remuneration.
• Following RG 175.299 – RG 175.301 in formulating a client’s relevant circumstances and ignoring Standard 2 requirements to consider the client’s long-term interests and likely future circumstances.
• In formulating your appropriate personal advice per RG175.362 – RG175.369, you neglect to take into account the broader and long-term interests of your client, and likely effects on other family members; and or fail to consider whether your product recommendations should be limited to “ethical” or “responsible” investments. (Standard 6)
• Explain your terms of engagement to a client and ask the client to sign a letter of engagement, but you do not take the extra steps (Standard 4) to ensure that the client understands your terms, conditions and fees, as well as any limitations on advice, and that the client provides free, prior and informed consent before engagement commences
• Communicating personal advice to a client as per RG 175.238(f) but not taking extra steps (Standard 5) to ensure the client understand advice and furthermore to satisfy yourself that the client understands
• Accepting 3^rd party payments at adviser level (Standard 7) for acting for a client, even if the benefit is below $300 and properly disclosed in the SoA
• Omitting client-requested cash flow management and debt reduction strategies from the SoA because they do not fall under the Corporations Act definition of financial advice (RG121.20 – RG121.24) whereas Standard 2 requires that an adviser to provide and document advice that is consistent with the client’s purpose in seeking advice
• Making enquiries of a client (per RG175.302 – RG175.305) to assess relevant circumstances and relying on the s961H warning if you believe the client has supplied incomplete or inaccurate information. Whereas Standard 2 says you are not relieved of the ethical duty merely because the client does not provide enough information, even when asked.  In practical terms it is hard to draw any other conclusion other than to decline to provide the advice.

Question 67

As an adviser specialising in insurance advice, I receive commissions for the advice I provide my clients. Is this conflicted and will I breach the Code of Ethics?
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, an adviser before acting for the client would need to satisfy themselves that they do not have an actual conflict by for example demonstrating the following:
• The advice and product recommendation is in the best interests of the client;
• The commission received is fair and reasonable and represents value for the client and is fully understood by the client;
• The client understands benefits, costs and risks of the insurance advice;
• The advice and fee structure are appropriate for the client; and
• 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.  (see Preliminary Response to Submissions FG002 Financial Planners and Advisers Code of Ethics 2019 Guidance)

Question 68

As an adviser specialising in stockbroking, I receive brokerage fees for the advice I provide my clients. Is this conflicted and will I breach the Code of Ethics?
Brokerage fees are generally an allowable form of remuneration for advice on shares. In the context of a specific client situation, an adviser before acting for the client would need to satisfy themselves that they do not have an actual conflict by for example demonstrating the following:
• The advice and product recommendation is in the best interests of the client;
• The brokerage fee is fair and reasonable and represents value for the client and is fully understood by the client;
• The client understands benefits, costs and risks of the share advice;
• The advice and fee structure are appropriate for the client; and
• 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.  (see Preliminary Response to Submissions FG002 Financial Planners and Advisers Code of Ethics 2019 Guidance)

Question 69

As an adviser I have a referral arrangement with a Mortgage Broker. I refer my financial advice clients to the Mortgage Broker when my clients need help with their mortgage or any new loans. In return the Mortgage Broker gives me a $500 payment from the commission he receives for the loan/mortgage. Given this is not a financial product that is affected by the Code can I still receive this fee?
Answer: Referral fees received from a third party directly to the adviser will breach the Code of Ethics. (see Theme 3: Clarifying Referral Fees; Preliminary Response to Submissions FG002 Financial Planners and Advisers Code of Ethics 2019 Guidance)

Question 70

1. What do you advise Paul?

The Moral and Ethical dilemma:

You are stuck in the middle, and not where you want or choose to be.  If you tell Mary, you will be breaching Paul’s confidence. If you withhold the information from Mary you will be violating her trust.

Your position (Corps Act and Code)

In this case, both Paul and Mary are clients, not just Paul.  The Code of Ethics ‘values’ require that you act with integrity and fairness in your dealings with both of them.  You have a duty to act in the best interests of both Paul and Mary.  As Para 35 Standard 2 states, “You must treat all clients fairly, as between themselves”.

Possible actions

It is not your job to inform Mary.  That is Paul’s obligation and responsibility.  Accordingly:

• Tell Paul that you refuse to be stuck in the middle and that you will not proceed any further until all of Paul and Mary’ relevant circumstances are out in the open (Paul’s secret is a relevant circumstance that affects Mary).
• Depending on the circumstances, you might consider telling Paul that you will give him a short amount of time to rectify his family situation, which must include a written statement from Mary stating that she is fully aware of the additional relevant circumstance.
• Because the relevant circumstances have changed, you will then require Paul and Mary to attend a third meeting to discuss the way forward.
• Tell Paul that if he refuses to comply with your request, you will be unable to act or provide advice for both parties, due to the conflict of duty that has arisen.

2. What steps could you take to prevent this difficult circumstance arising again?

Put in place an ethical charter for clients outlining what actions you will take in the event that:

• One party to a joint client relationship discloses information to you that has been withheld from the other party.
• A client reveals a breach of the law e.g. fraudulent statements made to the ATO or Centrelink

This client charter would then form part of the advice process that is explained to clients at the first interview.  As part of the new on-boarding / engagement process, clients must agree to the charter.  They will then know what to expect.

Question 71

Standard 6 – “You must take into account the broad effects arising from the client acting on your advice and actively consider the client’s broader, long-term interests and likely circumstances.”

Scenario

Alfred comes to see you for estate planning advice.  He is a 75 year old widower who wants to leave his $1.2M superannuation balance to his 45 year old son Sam, and two (2) residential properties to his 14 year old granddaughter Sarah.  Alfred alone is your client.

Questions

1. In your advice, are you required to consider the implications for Sam and Sarah? YES or NO

This standard expressly requires you to take into account the broad effects of the client acting on your advice. These effects are not limited to effects on the client. For example, your advice may have implications, not just for the client personally, but also for other family members of the client Standard 6 para 49

2. Are you required to act in the best interest of Sam and Sarah? YES or NO

Although the implications for Sam and Sarah will need to be taken into account, you will not have a duty to act in the best interest of the family members if they are not clients of you or your principal Standard 6 para 49

3. Write down two (2) issues in the advice to Alfred that would have implications for son, Sam

• To ensure Sam receives the money, Alfred should ensure that Sam is the nominated beneficiary for his superannuation account and should consider making it a binding nomination and ensure the nomination remains current (i.e. renewed if necessary)
• Sam, being an adult chid, is a dependent for superannuation purposes but not for taxation purposes so the superannuation death benefit is likely to be taxable

4. Write down two (2) issues in the advice to Alfred that would have implications for granddaughter Sarah

• Sarah is a minor for another 4 years so the residential properties may have to be held in trust (e.g. testamentary trust) until she turns 18
• The likely Capital Gains Tax (CGT) implications for Sarah after she inherits the properties should be considered and set out in the advice

Question 72

Scenario

Frank and Fiona Farmer come to see you for estate planning advice.  They have owned and worked their $5M farm for the past 40 years and want to pass it to the next generation.

Their adult son Freddy has worked on the farm all of his life and wants to follow in his parents’ footsteps.  He wants to inherit the farm and continue the family farming tradition.

However, adult daughter Felicity is not interested in staying on the farm and is planning to move to the city soon.

Nevertheless, Frank and Fiona want their farm to continue down the generations, and also want to treat both children equally and fairly in their estate plan.  The farm is their only asset.  They have no superannuation or investments and very little savings.

Question

Write down two (2) issues relevant to the advice you provide to Frank and Fiona

• When an estate planning question about a farm arises, the issue is usually how to treat both children equally and fairly with a single seemingly un-splittable asset.
• Firstly, a will is required
• One distribution strategy may be ‘Asset Equalisation’. That is to leave the farm to Freddy and create another asset of the same value for Sarah in the form of a personal risk insurance policy.  In theory, a $5M life insurance policy in favour of Sarah solves the problem upon the death of both parents.
• There are some difficulties with this strategy, namely that premiums on a $5M death cover become expensive for older people, and being farmers, cash flow could be a problem; also the policy may expire before the parents do. Another issue to consider is the CGT taxation consequences arising for the children on life insurance proceeds (Felicity) and inheriting the farm (Freddy)
• An alternative strategy may be to leave the farm to Freddy and Felicity and their future descendants in a will that includes a testamentary trust with both children named as trustees. This may have longevity benefits as well as future generation taxation benefits.

(These are my thoughts only.  You may have other strategies and if so, I would love to hear them)

Question 73

The market price of a bond with a par value of $1,000 and a coupon rate of 10% falls to $750.  What does the effective yield do?

1. Rise
2. Fall
3. Stay the same

 A bond is a form of debt where the bond purchaser is effectively the lender and the bond issuer is effectively the borrower.  Consider the following example:

A bond has a Face Value (or par value) of $1,000 and a Coupon (interest) Rate of 5%, therefore the Annual Coupon Payment will be $50.  Conversely, a bond with a Face Value of $1,000 and an Annual Coupon Payment of $50 will have a Coupon (interest) Rate of 5%.

In this example of a bond with a $1,000 face value bond and a coupon interest rate of 5%, no matter what happens to the bond’s market price, the bondholder will receive $50 (5%) that year from the issuer.

Also if the market price of the bond remains at $1,000 the effective yield of the bond will be equivalent to the coupon rate.  That is 5%.

However, if the bond market price rises from $1,000 to $1,500, the effective yield* on that bond changes from 5% down to 3.33%. If the bond price falls to $750, the effective yield rises to 6.67%.

(*Effective yield is calculated as the bond’s coupon payments divided by the bond’s current market value)

e.g. $50 / $1500 x 100 = 3.33%

e.g. $50 / $750 x 100 = 6.67%

Question 74

William contacts Emma, his financial planner, for information and advice about investing an inheritance.

William recently received a cash inheritance and would like some information about possible options for investing it.

Scenario 1 – Statement made by Emma to her client William

“When receiving an inheritance, 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.”

Is this statement

1. General advice
2. Factual information
3. Personal advice

Does Emma need to operate under an AFS licence to make this statement?  YES or NO

Scenario 2 – Statement made by Emma to her client William

“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 has the effect of freeing up cash flow. Before paying off any debt, I advise clients to consider whether early termination or legal fees apply.”

Is this statement

1. General advice
2. Factual information
3. Personal advice

Does Emma need to operate under an AFS licence to make this statement?  YES or NO

(see RG244 Example 1 page 38) 

Factual information is objectively ascertainable information, the truth or accuracy of which cannot reasonably be questioned

Financial product advice generally involves a qualitative judgement about or an evaluation, assessment or comparison of some or all of the features of a financial product.

General advice – You can use personal information about a client to give general advice that is more relevant to a client. However, you must ensure that you do not, in fact, consider the client’s relevant circumstances when you prepare and give the general advice. If you do, you will be giving personal advice. You cannot avoid this by giving a general advice warning to the client.

Question 75

Rachel contacts Robert, her financial planner, for information and advice about salary sacrifice into superannuation.

Scenario 1 – Statement made by Robert to his client Rachel

“If you are on the highest marginal rate of income tax, salary sacrifice would allow you to reduce your annual income tax by about 15%

Is this statement?

1. General advice
2. Factual information
3. Personal advice

Does Robert need to operate under an AFS licence to make this statement?  YES or NO

Scenario 2 – Statement made by Robert to his client Rachel

 “Salary sacrifice is a strategy that allows high income earners to save income tax by contributing to superannuation that part of their salary which attracts the highest rate of tax.”

Is this statement?

1. General advice
2. Factual information
3. Personal advice

Does Robert need to operate under an AFS licence to make this statement?  YES or NO

Question 76

1. Is the following statement TRUE or FALSE?

”If you set your goals unrealistically high you could be setting yourself up for failure.”   TRUE

This relates to the planning fallacy see p249 Thinking Fast and Slow, by Daniel Kahneman, and resembles a statement on p254 “She is the victim of a planning fallacy.  She’s assuming a best case scenario, but there are too many different ways for the plan to fail, and she cannot foresee them all.”

Question 77

Scenario

A new client called Andrew visits you for an initial appointment.  Andrew is very well dressed and has the appearance of affluence.  During the initial first appointment, he asked a lot of questions about different investment options and structures.

This initial interview which would normally last for one hour only, dragged on for two hours and you didn’t get very far with the fact find because he asked so many questions.  After two hours, Andrew said he had to leave.  He complemented you on your knowledge and asked how much he needed to pay for the appointment as he likes to pay his own way.

You inform Andrew that even though your FSG states that the hourly rate is $300 per hour, the first appointment is complimentary.   You leave the room and when you return you find Andrew has tucked $600 under his empty coffee mug.

Questions

What would be two steps you should take after finding this money?

(You may other responses)

1. Refer to Licensee / Compliance Manager to see if there is a protocol for dealing with this situation
2. Return the funds as soon as possible, together with a letter stating that factual information only was provided, and that it should not be relied on in lieu of personal advice; and that he should return so that the personal advice process can be properly completed
3. If the money can’t be returned, send a tax invoice to Andrew with the same letter in 2. above
4. If the money can’t be returned, remit it to Licensee, together with a copy of the tax invoice, as authorised representatives are not permitted to accept payment directly

What two concerns might you have taking Andrew on as a client after this?

(You may have other responses)

1. Andrew’s lack of interest in completing the Fact Find may indicate that Andre may not return or, if he does, he may not be forthcoming with all information necessary to provide him with personal advice.
2. Andrew’s excessive interest in investment options and structures indicates that he may look to establish some of these on his own and to do so may not be appropriate to his relevant circumstances

Question 78

Scenario

Your client Annette has recently finalised a divorce and her ex-husband has agreed to pay child support of $220 per week for their two young children who both live with Annette.

Annette is looking to get back on track financially now that the divorce is over. She works part time in a child care centre and earns $30,000 per annum, has $11,000 in cash (not secured in a safe) at home, $20,000 in super and owns her home outright.

Questions

What two financial risks to Annette are insurable?

(You may have other responses)

• The risk of interruption to her ability to work and earn income by illness or accident
• The risk that she might die prematurely (or become TPD, or suffer a trauma medical event / critical illness) and there is insufficient money available to ensure her children are adequately raised and educated
• The risk of Annette having insufficient superannuation at retirement
• The risk that the cash kept unsecured at home may be stolen

What two financial risks to Annette are uninsurable?

(You may have other responses)

• The risk of reduced employment or total unemployment not associated with illness or injury
• The risk that her former spouse defaults on child support payments
• So-called ‘Acts of God” – the financial loss associated with death, illness or injury because of e.g. war, earthquake, pandemic

How would you ask Annette about how she obtained such a large sum of cash (i.e. $11,000) at home?

(You may have other suitable questions)

• I notice that you keep a large amount of cash in your home.  Is that because you don’t trust banks or you need help to invest it wisely

Question 79

Read the following statements in the table below and determine whether the type of remuneration referred to is allowable non-conflicted remuneration (YES) or non-allowed conflicted remuneration (NO)

Reference: RG246

ARE THE FOLLOWING FORMS OF REMUNERATION ALLOWABLE OR NOT?	YES / NO
A volume based bonus paid by an AFS licensee to an employee which is accompanied by an affirmation signed by both the licensee and responsible manager stating that a benefit is not intended to influence the advice given RG 246.49	NO
A commission paid by a property developer to an adviser each time one of the adviser’s SMSF clients purchases a property from the developer Example 2 p16.	NO
A $1,000 bonus (over and above the advice fee charged in relation to a financial product) paid by a client from the client’s own funds and paid to an adviser as a one off payment. RG246.62 & RG246.72	YES
A regular payment made by a margin lender, with client consent, to a financial adviser from interest income the margin lender charges and receives from its loan holders. RG 246.74 Scenario 2 p21	NO
A one off non-monetary benefit valued at $275 paid by a product supplier to an authorised representative RG246.84	YES
Non-product related monthly payments paid by an AFS licensee to an authorised representative to cover business expenses incurred in providing advice on behalf of the licensee. RG246.101	YES
An AFS licensee waves the monthly licence fees of its representatives for every month that they reach their target amount of risk insurance premium Example 8 p32	NO
An AFS licensee receives a commission from a platform operator but does not pass on any portion of the commission to its advisers who provide advice to clients on behalf of the licensee. Instead, the licensee uses the benefit to pay for its operating expenses, such as information technology costs.  The licensee does not direct its representatives to recommend this platform and provides a wide choice of platforms on its APL Example 9 p34	YES
An asset fee charged on money that has been borrowed and invested RG246.191	NO
An asset fee charged on an investment product where the client participates in a dividend or distribution reinvestment plan in relation to that holding. RG246.208	YES
An asset fee charged on an amount that a client redraws from his home loan and invests in managed funds RG246.193	NO
An asset-based fee on instalment warrants where the asset-based fee is referable to the debt component of an instalment warrant. RG246.199	NO
An asset-based fee is a brokerage fee for arranging a share portfolio RG246.203	YES
A commission on a group life risk policy inside superannuation, provided that it is not a default superannuation fund or a MySuper fund RG246.278	NO
A commission on a new non-superannuation risk insurance product sold after 1 January 2020 where the upfront and ongoing commissions are is capped at 60% and 20% respectively  and satisfies the current clawback provisions RG246.277 and Table 7 p80; Clawback provisions in  Table 10 p84	YES

Question 80

Scenario

Kate and Jim seek advice from financial adviser Tom in regards to savings, investment, debt, superannuation, and financial protection on behalf of herself and her husband.  Kate is 48 years old and married to Jim 50 years old.  They have an 18 year old son Luke who suffers from Autism Spectrum Disorder.   Kate is an advertising executive earning $150,000 p.a. and Jim is a full time home Dad.

Tom provides comprehensive advice, summarised as follows:

• A family budget which proposes cutbacks on discretionary spending and identifies $1,000 per month in savings
• An investment recommendation with upfront and monthly contributions
• An accelerated debt repayment strategy
• A superannuation strategy for Kate with a binding nomination to Jim as beneficiary
• A superannuation strategy for Jim with a binding nomination to Kate as beneficiary
• Income protection, death, TPD and trauma insurance for Kate with a death cover nomination to Jim as beneficiary
• Death cover for Jim with a nomination to Kate as beneficiary

Questions

Which Code of Ethics standard has Tom not complied with?

• Standard 6 – did not consider Luke

What should Tom have done to comply with the Code of Ethics?

• Taken into account Luke’s circumstances and his future needs
• The advice perhaps could have included Luke as a beneficiary of the super and insurances
• Perhaps a recommendation should have included a referral to a competent legal professional to arrange Wills and a trust for Luke to provide for his ongoing needs in the event of the death or long term incapacity of his parents

To whom does Tom owe the best interests duty?

• Kate and Jim

Question 81

Scenario

Bob is a 50 year old client who asks financial adviser Bill whether a SMSF is appropriate and if so, to help him set up the fund for him.

Bill fully explains the pros and cons of a SMSF and after two substantial interviews with Bob, he is satisfied that Bob understands trustee responsibilities and obligations; and that he is an experienced investor.

Bill recommends that Bob set up a SMSF and transfer money across from his existing retail super fund.  He further recommends that he uses ‘Super Admin R Us’ which a specialist SMSF administration company in which Bill has an ownership interest.

Questions

1. Which Code of Ethics standard is Bill at most risk of breaching as a result of the advice?

• Standard 3 on the face of it, a conflict of interests

2. What are two (2) steps Bill should take to ensure he complies with the Code of Ethics?

• He can present Bob with a choice of several competent SMSF administration firms.
• To avoid a conflict of interest, Bill must clearly establish that the advice is in Bob’s best interests and in compliance with all provisions of the Code, including establishing the fees and charges are fair and reasonable and represent value for money for Bob.

Refer to Example 7, FG002 Financial Planners and Advisers Code of Ethics 2019 Guidance

3. What questions could Bill ask Bob to satisfy himself that the Bob understands the risks and benefits of starting up a SMSF?

Ask questions around the following dot points (Note: Do not use dot points in the adviser exam.  Use short succinct sentences.)

Pros of A SMSF

• Control over the fund
• Investment Flexibility
• Quicker Decision Making
• Lower Costs for Bigger Funds (and vice versa)

Cons of a SMSF

• Admin and compliance is time-consuming
• Client bears financial and legal Risks In Decision Making
• Inability To Access Government Compensation Schemes
• Reduced Access to Dispute Resolution Bodies

Question 82

You are reviewing an existing client couple who are both in receipt of the full Age Pension.  As you are updating their income details when you realise that they have not been declaring to Centrelink an additional amount of income they now earn and, as a result, they have both receiving pension over-payments from Centrelink for almost a year.  What should you do?

1. Inform your clients of the need to declare income and change of circumstances to Centrelink, and strongly recommend they contact Centrelink immediately
2. Make a report to AUSTRAC in the form of a Suspicious Matter Report (SMR)
3. Complete an online Suspected Fraud report to Centrelink / Services Australia
4. Either 2) or 3) above

References

Page 16 ‘Australia’s Financial Planning sector- Money Laundering and Terrorism Financing Risk Assessment’ https://www.austrac.gov.au/sites/default/files/2019-06/financial-planning-sector-risk-assessment-WEB.pdf

Reporting Fraud at Services Australia https://www.servicesaustralia.gov.au/individuals/contact-us/reporting-fraud

Question 83

Financial adviser Sarah conducts a public seminar on self-managed superannuation.  The audience are all members of the public attracted by a targeted marketing campaign.  Sarah’s objective is to provide as many of these people as possible with personal advice at a later time.

Sarah introduces herself by name and tells her audience that her Financial Services Guide is available at the front desk and at the door should anyone wish to take one.  She proceeds with her presentation which is general advice supported by factual information in the form of SMSF statistics.

Halfway through the seminar, an audience member asks Sarah a question about how this could apply to him.  Sarah instantly realises that she’s forgotten to provide the required s949A warning, and does so immediately by stating, ‘This advice may not be suitable for you because it is general advice.’

Has Sarah breached the Corporations Act?  YES or NO

If so, how has she breached the Act?

1. Sarah has not breached the Corporations Act in regards to the general advice warning. The simplified oral warning required in a face-to-face situation specifies that the warning must be given once but does not stipulate that it must be given at the start.

RG 175.56 – The simplified warning requires that a retail client be orally warned that the advice is general and may not be appropriate for the retail client. Under the relief, a warning only needs to be given once in any telephone conversation or face-to-face meeting where general advice is provided to a retail client.

2. However, Sarah has not provided each audience member with a FSG (which is not a problem in itself) but may have breached the Corporations Act by omitting to provide certain FSG-related information before the general advice was provided.

Reference – RG175.106 – An FSG is not required to be given to a client in certain circumstances, including where …

(d) The financial service is general advice provided in a public forum (but only if the information mentioned in s941C(5) is given to the client before the advice is provided)

The required information is as follows:

• a statement setting out the name and contact details of the providing entity
• information about the remuneration (including commission) or other benefits that any of the following is to receive- providing entity, employer, licensee, associated entity, any other relevant person
• Information about any associations or relationships between the providing entity, or any related body corporate, and the issuers of any financial products, being associations or relationships that might reasonably be expected to be capable of influencing the providing entity 

RG175.106-109

Consider what might be different in Q83 if the audience was staff and existing clients instead of members of the public.  Would anyone need a FSG or the information referred to in RG175.106(d)?  Probably not!  Staff members don’t need a FSG if they are there for support / networking with clients / work-related training, (and not prospective advice recipients); and existing clients don’t need another FSG unless there is an updated version. (see RG175.107).  The overriding consideration is that an FSG must be given to a person as soon as practicable after it becomes apparent to the providing entity that a financial service will be, or is likely to be, provided, regardless of who they are.

(These FSG requirements are designed to ensure the public is is informed and aware.  Consider the example of a financial planner who has an association with a property developer, presenting the benefits of self managed super to an unsuspecting audience, for the purpose of steering them towards buying a property from the property developer, where the planner is paid by the developer for each property sold.  The audience would want to know who is behind it; i.e. the association with the property developer; and the payment received by the FP on each property sale.  They could then work out for themselves that the advice is tainted)

Question 84

SCENARIO

Sam is a provisional relevant provider who has completed the first two quarters of his professional year under the supervision of Anne who has been a relevant provider for 3 years.

Sam successfully completes the adviser exam and is authorised by ACME licensee.  Sam now commences the 3^rd quarter of his professional year.  Under the standard terms of the work program he is now under the limited and indirect supervision of Anne.

Sam sees his first client alone.  He conducts the interviews, analyses the information; bases his advice on the client’s relevant circumstances; prepares his SoA and clearly explains the advice to the client, all without Anne’s presence or interference.  The financial product advice is implemented in full.  Later, the client complains about the recommended product.

 Question A

Who is responsible for the SoA and the advice it contains?

1. Sam the provisional relevant provider (who is now authorised)
2. Anne the nominated supervisor – s921F (3)-(6) ‘Role of Supervisors’
3. ACME the licensee
4. All of the above

 Question B

What is the minimum requirement in terms of years of experience as a relevant provider for Anne to be a supervisor?

The Supervisor must have at least 2 years of experience operating as a relevant provider (after completion of the work and training requirement) – FPS003 Work & Training (Professional Year) Policy (page 5)

Question 85

A. Which of the following types of clients must receive a Product Disclosure Document (PDS)?

1. Wholesale clients only
2. Both retail clients and wholesale clients
3. Retail clients only
4. All clients

RG168.1 & RG168.16

 B. When providing advice to retail clients, which disclosure document is appropriate to each of the following three client questions?

1. What service am I getting? FSG
2. What advice am I getting? SOA
3. If the advice is personal, what product am I buying? PDS or Short-Form PDS

RG168.1 & RG168.16

Question 86

A. To make a complaint about share market insider trading, who should you report it to?

This question has arisen at least twice.  It is a tricky question because a complaint can be made to to either ASX or ASIC.  ASIC is the market regulator and ASX ultimately reports back to ASIC.  ASIC does operate an anonymous online whistle blower service but will never reveal what action they are taking or if any action is being taken at all.  Also if you go to the market misconduct instructions on the ASIC website (https://asic.gov.au/about-asic/contact-us/how-to-complain/report-misconduct-to-asic/) there is no active referral back to ASX.

On the other hand, ASX  is always monitoring market integrity and openly welcomes breach reports; and they follow up with feedback about action taken. Any report of insider trading, market manipulation or other offence will be rapidly assessed by ASX which is in a much better position to investigate a possible breach quickly and to ensure merit to the complaint before passing it on to ASIC.  ASX is also in a better position to take immediate market action including cease trading if necessary.  Under s792B(2)(c) ASX is required to refer any significant breach to ASIC; and ASX directed referrals receive far greater prioritisation by ASIC.

On the basis that ASIC is the market regulator, it is likely that the answer for exam purposes is ASIC even though for practical purposes ASX is the body likely to be involved with real time action in the event of an insider trading complaint. (Note that in FASEA’s FG004 Practice Question Guidance (PQ52) Option B says that responsibility for managing market integrity was relinquished by the ASX from 2010)

, B. Where a client has a dispute with an Authorised Representative and the Licensee cannot resolve it, where should the Licensee direct the client next?

1. ASIC
2. APRA
3. AFCA
4. FOS (AFCA replaced FOS on 1 Nov 2018)

C. If you receive cash of $10,000 or more in payment for your financial services, to which organisation should you make a Threshold Transaction Report TTR)?

1. YOUR BANK (your bank would be responsible for making the TTR if you received it as a deposit directly into your account)
2. ASIC
3. APRA
4. AUSTRAC

A ‘threshold transaction’ is the transfer of physical currency of A$10,000 or more (or the foreign currency equivalent) as part of a designated service. A transfer can be either receiving or paying cash.

Question 87

What is “Risk profiling”?

Risk profiling is a process that professional advisers use to help determine the optimal levels of investment risk for clients. Risk profiling aims to identify a client’s level of required return; and therefore risk in meeting their investment objectives; their risk capacity and; their tolerance to risk.

Risk profiling is not specifically defined in the Corporations Act.  However, it is mentioned in RG 175.254 –

“We expect that processes for complying with the best interests duty will ensure that, within the subject matter of the advice sought by the client:

(a) the scope of the advice includes all the issues that must be considered for the advice to meet the client’s objectives, financial situation and needs (including the client’s tolerance for risk)”

It is also referred to in RG146 under Financial Planning (specialist Knowledge) on page 39.  It is also included on page 54 under the heading Skill Requirement #2 – Identify client objectives, needs, and financial situation; and under the heading of Skill Requirement #3 – Analyse client objectives, needs, financial situation and risk profile

The other point to make here is that if the adviser’s statement can be construed as a product recommendation  should be made as part of personal advice, not general advice.  Refer to Figure 1: Flow chart of investment process and disclosure documents required (p 9 RG168) – obligations for product issue & advice vs advice only.