It's hard to find anyone who has a problem with the introduction of a best interests duty.
Sure, some might say it covers the same territory as a code of ethics. Or, that it is already practised by the majority of professionals in the financial planning industry anyway.
But a clear and transparent definition of what it means to put the interests of the client first for both advisers and consumers is, on the whole, a welcome and evolutionary reform for the industry.
Take it from the accountants.
"A best interest duty is at the heart of the profession and professional judgment," Institute of Chartered Accountants in Australia (ICAA) head of financial advisory services Hugh Elvy says.
"Therefore it is critical that it is appropriately defined and it is embedded into the legislation."
But some interesting twists have now emerged around this seemingly innocuous part of the Future of Financial Advice (FOFA) reforms.
At the Parliamentary Joint Committee (PJC) on Corporations and Financial Services hearings held in Sydney in January to discuss the draft legislation, it became clear most industry players do not support the current version of the best interests duty.
Further, in debating and arguing for changes to the wording in the draft legislation, there would then be significant issues around the industry's ability to deliver scalable advice.
"If you hold everyone to a full definition of a best interest duty, can you deliver scalable advice?" FPA chief professional officer Deen Sanders asks.
"These things are uncertain."
What the industry needs best
interest to look like
Following the Ripoll inquiry in 2009, there were calls for amendments to the Corporations Act to include a fiduciary duty for financial advisers operating under an Australian financial services licence.
Over the past three years, this fiduciary duty has evolved.
"What is beginning to be understood by many is that the best interests duty is intended to be a legal alternative to a fiduciary duty," Sanders says.
For the past 18 months, Treasury has been negotiating the words around a best interests duty to try and enshrine the priority obligation that the client's interests have over those of an adviser or licensee.
According to the ICAA, the best interests duty reflects the need for not only legal reform but also cultural change in the financial planning industry.
In its submission to the PJC in 2009, it called for an emphasis on both aspects
of reform.
"While you can embed a best interest duty into the Corporations Act, it's also a cultural/ethical way of behaving," Elvy says.
However, making this a reality has proved to be very difficult. A definition of a best interests duty requires some parameters to ensure clarity and compliance, but also some scope to allow a profession to exercise its professional judgment.
"The big issue and challenge is finding the balance between the role of the profession and providing them with principles, but at the same time providing prescription on whatever best interest duty is going to be," Elvy says.
Association of Financial Advisers chief executive Richard Klipin says in the case of a best interests duty, a principles-based approach is far more beneficial because the legislation is "trying to address behavioural issues."
What the industry wants best
interest to look like
The industry certainly supports a best interests duty, but there is a real concern that if the wording is not right, it could become problematic for practitioners.
"While the notion [of a best interests duty] is very appropriate and we support it, we don't want it to tie the industry up in red tape," Klipin says.
There is therefore a clear line of distinction between a workable drafting of a best interests duty and an unworkable one.
"Wording is what interests us the most. Our whole model addresses the broad definition of best interest duty, putting the client at the centre of the whole transaction," MLC head of advice Richard Nunn says.
Certainly, based on many of the witnesses' presentation at the PJC hearings in January, the wording of the current version of the draft legislation around the best interests duty was worrying.
Witnesses described it as obtuse and unclear, with the area of a safe harbour provision simply confusing.
In the Law Council of Australia's written submission to the PJC, prepared by the Superannuation Committee of the Legal Practice Section and dated 22 December 2011, it stated: "The gap between what the general law says about a best interests duty and what section 961B calls a best interests duty will raise significant uncertainty for the providers of advice and their advisers in determining what is required by a provider in order to discharge their duty and to satisfy the steps set out in section 960B(2)."
Particularly unsuitable to the majority of witnesses attending the PJC was point (g) in section 961B(2) of the draft legislation.
It was argued that although in section 961B(2) of the draft legislation it said a provider would be deemed to comply with the statutory best interests duty if they proved they had satisfied all of the steps in section 961B(2), (g) of the same section undid this certainty.
Further, it undermined the safe harbour provisions created in 961B(2).
Paragraph (g) refers to ensuring advisers have "taken any other step that would reasonably be regarded as being in the best interests of the client, given the client's relevant circumstances".
Industry response to this paragraph has been fairly consistent.
"The challenge for us as operators in the industry is how we then scope what else is relevant and how we apply the law," AMP Financial Services managing director Craig Meller told the PJC.
Meller adds: "Our concern is that we will be putting legislation in place and we will have to wait a number of years until a case study builds to allow us to understand how the courts are going to interpret the legislation."
Nunn says: "To take any other step [referring to the draft legislation], that is a very open-ended safety valve there to have a go at advisers regardless."
Meanwhile, Sanders says: "People saw that it appears to call for a requirement of individuals to take into account the knowable and the unknowable."
It has been suggested paragraph (g) should therefore be removed, however, it also has its supporters.
"If you were to remove (g), you would remove effectively the flexibility," ASIC commissioner Peter Kell told the PJC.
"My experience with these sorts of reforms is that often industry actually wants both. They want some certainty, but also some flexibility."
And this from Treasury markets group executive director Tim Murphy: "... if you take out (g) you are virtually going back to a tick-a-box type arrangement. With (g) it is taking any other step, so the provider satisfies the duty and takes any other step that would reasonably be regarded as being in the best interest of the client, given the client's relevant circumstances."
Best interest clashes with
scalable advice
The emphasis on a best interests duty was to address two key issues: conflict and prioritisation.
Not only do financial advisers act in the best interests of the client, but also that they prioritise these interests in the case of conflict with an adviser's own interests.
(As an aside, how an adviser could comply with a best interests duty yet breach the duty to prioritise the interests of the client remains a point of confusion.)
Meanwhile, although best interest would impact on scalable advice, it would be ASIC which would then supply the work able solution rather than legislation. As such, the jurisdictions of both reforms seemed quite clear.
"However, what has occurred in the intervening period, the way best interest has been constructed is to have an emphasis on a fact find. The current construction of best interest is that the only scalability is the scalability of the client's needs," Sanders says.
This then impacts on the cost and scalability of advice. That is, how can scalable advice be provided if it is interpreted that a full fact find is indeed what is required to comply with the best interests duty?
The FPA argues there is a missing element to both debates and removing paragraph (g) is not going to help either.
"It is important that there's a capacity for best interests duty to be scalable to the advice of the client and to the competency of the adviser," Sanders says.
"We think there is a benefit to having a best interest duty that is scalable."
What could happen
When the legislation is finally passed, a regulatory guide will be issued by ASIC to provide further meaning and clarity as to how the final legislation will work.
There is concern that compliance to the letter of the law could require some sort of checklist. There are mixed feelings as to how a checklist could work.
"To ensure that an overarching approach is to change behaviour, it's not a tick-the-box approach," Elvy says.
"While you need to tick some boxes, you still need a principle approach."
The FPA believes Treasury is unlikely to remove paragraph (g) from 961B(2). However, it suspects the recommendations from the PJC will include the suggestion to remove paragraph (g).
The final word goes to ASIC strategy and policy senior executive leader John Price, who told the PJC: "I think the question is, what policy result do you want to achieve? That is really a matter for government. The stark choice I am drawing is whether or not you want a tick-a-box approach, which you really get very close to if the provision in (g) is removed, or whether you want to transform this into a profession and have people exercising particular judgment in particular cases as other professionals do."
What's on the table
The general obligation for providers of advice to act in the best interests of their clients is contained in schedule 1, item 23, division 2, subsection 961B(1).
The guiding principle in the application of the best interests obligation is that meeting the objectives, financial situation and needs of the client must be "the paramount consideration when going through the process of providing advice".
Schedule 1, item 23, division 2, subsection 961B(2) contains the steps then that providers may prove they have taken to demonstrate they acted in the best interests of the client.
The Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 Explanatory Memorandum states: "The list of steps in subsection (2) that may be taken to satisfy the best interests obligation includes a number of relatively specific steps (paragraphs (a) to (f), several of which incorporate a 'reasonableness' element) as well as a more general step (paragraph (g)) requiring the provider to demonstrate that it has taken any step that would reasonably be regarded as being in the best interests of the client, given the client's relevant circumstances."
According to the draft legislation, these steps are not intended to be exhaustive or a mechanical checklist. It is paragraph (g) in these steps that is causing industry the most grief.
Provision dealing with Scalable advice
The draft legislation on a best interests duty regards itself as complementary to the provision of scalable advice.
As stated in the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 Explanatory Memorandum: "As long as the provider acts reasonably in this process and bases the decision to narrow the subject matter of the advice on the interests of the client, the provider will not be in breach of their obligation to act in the client's best interests."
Further: "The scaling of advice by the provider must itself be in the client's best interests, especially since the client's instructions may at times be unclear or not appropriate for his or her circumstances."
