“ A key objective of the FOFA reforms was to facilitate access for retail clients to financial product advice, including ‘scaled’ advice; that is …[a] ‘targeted form of personal advice’.”
— CORPORATIONS AMENDMENT (STREAMLINING OF FUTURE OF FINANCIAL ADVICE) BILL 2014
In 2011, the FoFA reforms introduced the concept of “scaled advice”, which is advice about a limited range of issues, to create a level playing field for people who provide advice.
Consequently, the Corporations Amendment (Further Future of Financial Advice Measures) Act 2012 contained provisions about the best interests duty to clients designed to accommodate the provision of limited or “scaled advice”.
Scaled Advice generally only looks at a defined or specific issue (for example on retirement planning). “Holistic” advice, in contrast, has a broader scope and considers more aspects of a client’s relevant personal circumstances.
In situations where clients sought, needed or could only afford, limited advice, the effect of the reforms was to allow advisers to tailor the information they sought to what was necessary to provide appropriate advice on that issue. However, the adviser was still required to exercise professional judgment and advise the client if they believed that advice on another subject matter would better satisfy their needs and objectives.
ASIC later recognised that all advice is scaled, and embedded scaled advice in a variety of material including Regulatory Guides RG 175 Licensing: Financial product advisers – conduct and disclosure and RG 244 Giving information, general advice and scaled advice.
In 2020, ‘scaled advice’ (or rather the barriers to providing scaled advice) has re-emerged as a pressing issue for the emerging advice profession.
ASIC, to its credit, has announced its willingness to consult with the industry on the issue of scaled advice.
An introduction to scaled advice
First, the fundamentals.
The personal advice you provide is likely to be appropriate if it would be reasonably likely to put your client in a better position and satisfy critical aspects of their relevant personal circumstances – those aspects of their objectives, financial situation, preferences and needs that are relevant to the advice sought.
As an adviser, the law, and your professional obligations require you to make sufficient inquiries to ensure the appropriateness of your advice.
Remember, if you provide personal financial product advice, you cannot avoid or disclaim your responsibility to consider your client’s “relevant personal circumstances”.
If your consideration of your client’s relevant personal circumstances is limited, for example, because of their reluctance to provide information, you’re obliged to highlight the limitations of your advice and draw their attention to the consequences of their decision.
To be clear, their reluctance and your warning does not free you from your obligation to either act in their best interests or provide appropriate advice. You don’t always have the luxury of full, complete and accurate information, but you have an obligation to pursue it.
The financial product advice you provide must be appropriate, but the extent of your consideration and investigation – your reasonable enquiries – is “scaleable”.
In simple terms, the extent of your inquiries is contextual and varies depending on the nature of the advice sought, the client’s capability and the reasonably foreseeable consequences of the advice.
All advice is scaled. Although the law suggests processes that may satisfy your ‘best interest” duty, there’s no ‘one size fits all’ approach and the way in which you satisfy your obligations depends on various considerations including:
- the likely impact of the advice. The greater the potential negative impact of your advice, the greater your obligation to broaden the scope of your enquiries and your recommendations. Although this might seem subjective and imprecise, it’s simply demanding due care and a contextual and objective assessment of appropriateness based on your knowledge, skill and experience;
- the complexity of the advice. You need to undertake less research, analysis and investigation where your advice is, according to reasonable standards, relatively simple;
- the likelihood of your client’s comprehension and understanding. The scope of your inquiries depends on the client’s ability to comprehend your advice and their own needs. This is at the heart of your professional duties and your FASEA obligations (“free, informed and prior consent” and “financial literacy”). Clients’ capacities, like their relevant circumstances, can vary considerably and so does your obligation to enquire, investigate and explain. However you articulate, explore and resolve your client’s needs, your advice process must consider:
- the limit of their financial literacy, knowledge and comprehension;
- whether they can articulate (or consistently express) their preferences, needs and objectives;
- whether their objectives clash with their appetite for, and tolerance of, risk;
- whether they are functioning under an impediment or disadvantage;
- whether they have unrealistic financial expectations or preconceptions.
ASIC’s views on scaling advice
“The way we regulate advice is the same, regardless of the way you deliver the advice or how you scale the advice. This is because, in general, the same rules apply to all advice on the same topic, regardless of how it is delivered. ”
— RG 244 Table 1
Despite advisers’ angst, ASIC have been consistently supportive of the need to tailor advice to a client’s needs and circumstances. However, conservatism and apprehension have prevented Licensees and advisers from consistently adopting the regulator’s lead.
In their 2011 Consultation Paper 164 Additional guidance on how to scale advice (CP 164), ASIC published guidance about how to scale financial product advice to retail clients. It differentiated between factual information, general advice and personal advice and reconfirmed that advisers could limit their inquiries to the agreed subject matter of the advice.
In response to industry responses to CP164, ASIC published RG 244 Giving information, general advice and scaled advice in December 2012. It was republished and updated in 2015.
In a simple, effective and constructive guide, ASIC explained:
- the differences between giving
- factual information,
- general advice and
- personal advice.
- how to meet the advice obligations in Ch 7 of the Corporations Act 2001, including the best interests duty and related obligations, when giving “scaled” advice (ie personal advice that is limited in scope).
“We don’t think the guidance stops you giving scaled advice”
— ASIC Commissioner Danielle Press, IFA 5 August 2020
In December 2017, ASIC published RG 90 Example Statement of Advice: Scaled advice for a new client. This guide provided an ‘approved’ example of personal advice (limited in scope to personal insurance) for a new client.
ASIC’s guidelines were conventional in most respects, but, interestingly, promoted the disclosure of fees and commissions in the SoA before the summary of the client’s needs and circumstances. Practically, in our experience, most clients prefer to confirm that their adviser understands their needs and circumstances before they grapple with the financial elements (Value before Price).
ASIC didn’t anticipate future legislative changes but simply relied on the law, and published an example (developed in consultation with stakeholders) that encouraged brevity by excluding the following from the SoA:
- disclaimers and warnings;
- financial product information;
- financial services provided; and
- additional information not material to the advice or basis of the advice.
The example was, almost universally and most unreasonably, rejected by most licensees and advisers. This was a shame, because the industry closed a window of opportunity on the basis of their concerns about format, execution and litigation risk.
Guidance and the law
“I think there’s lots of different words for it, but it’s about what are the barriers to providing scaled advice. It’s not about putting hard lines in, because hard lines aren’t necessarily helpful.”
— ASIC Commissioner Danielle Press, IFA, 20 October 2020
The exclusions in the RG90 example proved problematic for some because because s 961H of the Corporations Act 2001 requires warnings to be given if the advice is based on incomplete or inaccurate information.
Further, the example presumed that clients will read the PDS or that the adviser will draw their attention to the relevant information.
In light of regulatory actions and in anticipation of the FASEA Standards, advisers were concerned how this could be evidenced or proven in the event of a client complaint.
While comprehensive analysis may not be necessary where the client has only sought personal advice on a specific product, advisers’ best interest duty requires them to consider and investigate relevant financial products and strategies and not only those upon which they will provide advice.
This means, for example, that an adviser has an obligation to broaden the scope (or decline to provide advice) where they reasonably consider that the limited advice sought is not in the client’s best interests.
This does not mean that advisers are required to consider options outside the scope of their authorisation, but they must possess the awareness and knowledge to ensure their advice is appropriate.
If you are an adviser, your obligation to provide appropriate advice obliges you to make adequate inquiries to ascertain your client’s relevant personal circumstances – their investment objectives, financial situation and particular needs – and to undertake adequate product research before making any recommendation.
In ASIC’s view, even scaled investment advice requires you to consider your clients’:
- appetite for, and tolerance of, investment risk;
- need for regular income (eg retirement income);
- need for capital income;
- desire to minimise fees and costs;
- tolerance of the risk of capital loss, especially where this is a significant possibility if the advice is followed;
- tolerance of the risk that the advice (if followed) will not produce the expected benefits;
- existing investment portfolio;
- need to be able to readily cash in the investment;
- capacity to service any loan provided in relation to the financial product;
- tax position, social security entitlements, family commitments, employment security and expected retirement age; and
- as a matter of good practice, whether environmental, social or ethical considerations are important to them.
“ASIC (FARSA [sic] TPB etc) has absolutely no idea of how advice actually works – nor an understanding of the corporation act [sic]- sure you can provide scaled advice until some bottom dwelling lawyer decides that it wasn’t appropriate.”
— Anonymous, ifa 5 August 2020
We understand adviser’s apprehension and Licensees’ fears; regulatory and litigation risk are legitimate concerns. Nevertheless, we believe that they over-estimate both the likelihood and impact of these risks.
In our view, it is extremely unlikely an adviser – acting in a manner consistent with the Best Interest Duty and in accordance with the FASEA Standards – could provide scaled advice that exposes them to regulatory or legal risk.
The only real danger of scaled advice, is when the provisions are utilised for the convenience of the adviser and contrary to the client’s needs. ASIC, in particular, are well aware of this risk and noted that, in their experience
“particular topics were excluded from the scope of the advice, to the potential benefit or convenience of the adviser, and to the significant detriment of the client.”
— RG 244.49
Providing scaled advice
“I think for us to say our guidance is clear just because we think it’s clear is the wrong answer, because clearly the industry doesn’t think it’s clear”
— ASIC Commissioner Danielle Press, ifa 5 August 2020
So how, in practice, can you provide compliant advice limited in scope?
At the risk of over-simplification, start by clearly outlining
- the subject matter of the advice sought by the client, and
- the advice you are providing; and
- the advice you are neither considering nor addressing; and
- the real consequences and implications of this approach; and
- whether your professional duties require additional steps.
This information, and the detailed scoping undertaken in your discovery process, is critical to establishing the need for, and appropriateness of, scaled advice.
You are unlikely to satisfy your best interests duty (and the related obligations) if your client is unlikely to realise (or understand) the significant limitations or qualifications that apply to your advice.
To be clear, consistent with the FASEA Standards, any limitations of your advice (including, but not limited to its scope) must be explained in such a way that a reasonable person would understand the limitations and their consequences.
- You do not need to list every possible topic of advice that is not being provided to the client.
- Explain any exclusions and the topics outside the scope of the advice sought.
- Identify, and explain, relevant considerations that are outside the scope and subject matter of the advice sought.
- Explain why potentially relevant areas are not being addressed.