Bridging the Gap: Best Interests and formal compliance

Among other things, that review should consider whether it is necessary to retain the ‘safe harbour’ provision in section 961B(2) of the Corporations Act. Unless there is a clear justification for retaining that provision, it should be repealed.
— Final Report Recommendation 2.3 "Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry"

Care should trump compliance

The Final Report for the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is already a page-turner for financial services executives. But its appeal extends beyond those people wondering whether their ‘competency and character’ has led to them being referred for criminal prosecution.

In many respects, the Final Report echoes observations we made, and positions we took, some time ago.

While the ultimate legislative and regulatory outcomes will not be known for some time, we’re confident that those of our clients that moved beyond compliance are well placed to weather any likely changes.

We’ll deal with the Final Report in the course of time, but we did want to reflect on its view of the Best Interest Duty in light of Darren Snyder’s article dated 30 January 2019. His Financial Standard article titled “Advisers question value of best interests duty” observed that

One in five financial advisers disagrees or strongly disagrees the best interests duty was necessary to raise industry standards. And more than 70% believe the duty has not improved advice quality.

The article references research released by HUB24 . The report, which acknowledges the cooperation of Core Data and the Association of Financial Advisers (AFA) attempts to ascertain what “impact the introduction of Best Interests Duty and related obligations (together, the “Best Interests Duty”) has had on how advisers provide advice to clients.” The Researchers asked 56 questions to over 300 aligned, non-aligned and self-licensed advisers.

The responses were demonstrably positive in welcoming the changes and their impact on the industry.

66% of those surveyed believed that the Best Interest Duty had led to better outcomes and only 20.8% believed the requirement was a waste of advisers’ time and money.

Cynics might suggest that the “bandwagon effect”, selection bias, ingroup biases or expectations might more accurately explain the results than reality does. Indeed, one might find it hard to reconcile respondents’ positive view of the training they’ve received against ASIC’s results and an increasing number of bannings and regulatory actions.


Nevertheless, it’s an upbeat and positive finding that suggests a high level of engagement and acceptance within the industry. That might be true, except that over 70% don’t believe the duty has improved advice quality.

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And this is where the dissonance between ASIC and advisers becomes stark.

If recent conclusions about SMSF are to be believed, “90% of financial advice on setting up a self-managed super fund (SMSF) did not comply with relevant laws”. ASIC called for significant improvement, but it’s unlikely that the advisers themselves saw the advice in the same way.

In our view, based on our analysis of hundreds of files in 2018 alone, the advice processes of competent, capable and ethical advisers have not changed since the introduction of the Best Interests Duty.

However, this is not to suggest the advice processes of other advisers have not changed. Nor does it support the proposition that their processes and approaches do not need to change.

The best advisers - advice professionals - have never wavered from their ethical and professional commitment to act objectively in the interests of their clients and to promote their clients’ interests above any other party’s interests. For these advisers, the best interest duty, simply reconfirmed their approach to advice, service and care.

The challenge for every adviser is to objectively determine whether, and to what extent, the adviser’s processes and outcomes match those of the best advisers.

The future of safe harbours

By prescribing particular steps that must be taken, and allowing advisers to adopt a ‘tick a box’ approach to compliance, the safe harbour provision has the potential to undermine the broader obligation for advisers to act in the best interests of their clients.
— Final Report, "Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry", Page 177

As we’ve previously observed, while the statutory duty may be redundant for advice professionals, the ‘safe harbour’ provided by s961B(2) is problematic.

After all, while it’s suggestive, compliance with s961B(2) doesn’t prove that the adviser acted in the client’s best interests. Worse, the bureaucratic manner by which some licensees have interpreted and applied this requirement has frustrated advisers and often compromised otherwise clear, concise and effective advice.

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We’ve found that advisers struggle to reconcile their ‘best interest duty’ with the procedural requirements of the ‘safe harbour’ and the tension can be profound.

Our advice to advisers is to focus more of their attention on their clients’ best interests and their goals and objectives and far less attention on the partial defences to their failure to act in their clients’ best interests.

It appears that the Commission made similar observations, notwithstanding that no immediate change has been recommended.

Training and competency

Personally, we find it difficult to reconcile advisers’ positive view on the ‘best interests’ training they received against either REP515, our verification audits or ASIC data.

Large licensees, in our opinion, mirrored the biases and deficiencies of their audit approaches in their implementation of the best interest duty . We’ve heard of considered advice marked as defective because of an immaterial cost increase and other defective advice approved because the adviser demonstrated formal compliance with 961B(2).

AMP maintained an audit system in which issues of high importance (such as not pursuing the client’s best
interests) could be treated as ‘immaterial’ when forming the overall audit grading. No departure from the central duty of an adviser can properly be regarded as ‘immaterial’.
— Final Report, "Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry", Page 201

We’d encourage all advisers to embrace, and operationalise, their obligation to act in their clients’ best interests. We’d encourage them to embrace the substance of their duty over the form of their obligation.

We urge them to choose care and consideration over compliance.

We’d also warn them not to presume they, or their licensees, have all the answers.

Don’t assume that your processes, or your approach, is so refined that no change is necessary.

Seek advice. Get additional training from people who understand the law and its practical application.

Take the time to think about BID training in light of your new obligation to attest about training, capability and competence.

We’ve spent a lot of time thinking about these matters and we’re happy to help.

While you’re thinking about BID, there are some specific questions I think you should ask yourself (and your Licensee):
• What processes do you have in place to assess or measure compliance with the Best Interest Duty?
• What additional training is needed or available?
• Can you rely or depend on the training provided by the Licensee?
— Ben Moffatt, Senior Consultant