The perils of safe harbours

When forced to choose between clarity and compliance, most advisers make the wrong choice.

I appreciate that their choice isn’t entirely voluntary; some advisers consciously embrace formal compliance as the ‘safer’ option. Others do so unconsciously, a Pavlovian response to complexity, confusion and fear of consequences. Whatever their reasons, they make the wrong choice because the research shows that disclosure, and formal compliance, frequently frustrates clients’ understanding, legitimises conflicts and, too often, conceals the most egregious conduct behind prominent commitments to ethical conduct.

As an industry we’ve consistently struggled to promote quality above process. I appreciate that advice groups want to insulate their core banking and product manufacturing functions from the risks inherent in their wealth management activities, but emphasising consistency over quality has delivered sub-optimal outcomes for our industry and our clients. Compliance may have delivered a measure of consistency, but it has limited consumers’ access to exceptional advice and robbed advisers of the courage and certainty needed to provide clear, concise and effective advice.

As an industry we’ve consistently struggled to promote quality above process. I appreciate that advice groups want to insulate their core banking and product manufacturing functions from the risks inherent in their wealth management activities, but emphasising consistency over quality has delivered sub-optimal outcomes for our industry and our clients. Compliance may have delivered a measure of consistency, but it has limited consumers’ access to exceptional advice and robbed advisers of the courage and certainty needed to provide clear, concise and effective advice.

We’ve seen how this ideological conflict has played out in our advice documents; long, rambling and repetitive SoAs have become the norm. Checked steps and repeated commitments to clients that the adviser will “act in their best interests”, is substituted for any real attempt to demonstrably act in the clients’ best interests. Licensees, and advisers, obsessively focus on the “safe harbour” provisions and demonstrating how their advice is in the client’s best interests, rather than obsessively focussing on providing advice that is, in reality, in their clients’ best interests.

I appreciate that the sustainability of an industrial advice model depends on minimising risks and delivering consistent product, but doesn’t this emphasis perversely demonstrate a failure to act in, or prioritise, their clients’ best interests?  

I think that the current debate over the best-interest duty, and the value of the safe harbour provisions, is representative of the broader challenge to advice. If one believes that industrialised and corporatised models are the future of the advice industry, then prescription and structured processes are the keys to consistent profitability. If one believes that the future advice profession will be independent and structurally un-conflicted, then clients’ needs, objectives and required outcomes need to be prioritised above a process map.

In my experience, while great advisers embrace process, they don’t allow an obsession with process to distract their attention from either the desired result or the steps required to achieve it.

This is a controversial view. It’s convenient to accept Moshinsky J’s reasoning[1] that s961B is concerned with the process of giving advice. It’s reasonable to acknowledge that “retrospective testing against financial outcomes”[2] was never intended to be the measure by which compliance with the Best Interest Duty is assessed. It’s pragmatic to assume the law imposes a ‘better position” test. But as convenient, reasonable and pragmatic as these positions are, they’re fundamentally wrong and ultimately destructive.

Licensees’ willingness to embrace form over substance, and to venerate process over results should concern us all. It’s naive to believe that outcomes are entirely irrelevant, or somehow less important than complying with steps designed to provide, at best, a partial defence against failures to act in a client’s best interest. It’s illogical to suggest that advice in one’s best -interest must involve a change in circumstances. While established professions cleave to principles – “first, do no harm” – we demand, offer or receive, increasingly prescriptive measures designed to minimise negative outcomes. Unfortunately, the legal safety provided by the “safe harbour” is illusory. Instead of complaining about uncertainty, we need to embrace the opportunity to deliver exceptional outcomes. We should be confident that appropriate and considered advice, demonstrably in our clients’ best interests, can not be inconsistent with our obligations and duties.

I understand that uncertainty engenders caution ,but I think that we, as an emerging profession, need to accept the view that the best-interest duty is a more than a “legislative requirement to ensure the processes and motivations of financial advisers are focused on what is best for their clients.”[3] There has to be a substantive element. While the retrospective testing of advice outcomes is unhelpful, the consideration of likely outcomes should be a key component of any adviser’s duty.

ASIC’s “better position” compliance test[4] may be an aspirational standard in excess of the obligation imposed by 961B, but it should be the guiding star for those advisers leaving the legislative safe harbour in search of better outcomes.

In this respect, licensees need to place less reliance on checklists and rely more on advisers’ skill, competence and professionalism. Other professionals may use checklists, but they are not driven by them to the extent we are. A professional adviser is not an order taker. A professional adviser is not principally motivated to sell financial products. In reality,  an advice relationship is not a series of transactions but a relationship of trust, dependence and reliance. This relationship is the foundation of an adviser’s duty to act objectively, diligently and in their clients’ best interests.  

An adviser’s motivation, capability and competency, the processes they follow, and the likely outcomes of their advice are all essential elements of the best interests duty.

While the statutory defences outlined in s961B(2) may suggest whether, or to what extent, an adviser has complied with s961B(1), the adviser’s substantive conduct is, in my view, the key determinant for assessing their compliance with this duty. The processes followed by the adviser may, at best, suggest their advice was provided in the best interests of their client but it does not prove it. Let’s hope the Regulator shares this view and removes the regulatory obstacles to providing exceptional advice.

 

         

 

 

 

[1] ASIC v NSG Services Pty Ltd [2017] FCA 345

[2] Revised Explanatory Memorandum, Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011 (Cth) [1.23]

[3] The Hon Bill Shorten, then Minister for Financial Services and Superannuation, second reading speech to the Corporations Amendment (Further Future of Financial Advice Measures) Bill 2011

[4] ASIC Regulatory Guide 175, Licensing: Financial product advisers – Conduct and disclosure, March 2017, 175.225

 

 

(c) 2017 Assured Support Pty Ltd

(c) 2017 Assured Support Pty Ltd