ASIC has accepted an Enforceable Undertaking from a financial adviser, Mr. Allen, after ASIC alleged that he breached his best interests’ obligations.
ASIC alleges that Mr. Allen did not:
- Make reasonable enquiries into clients’ circumstances
- Consider and properly investigate the subject matter of the advice
- Provide appropriate advice
As a condition of the Enforceable Undertaking, Mr Allen must not provide financial services, or be a director or manager of an AFS licensee, for three years. With the new education and accreditation regime coming in, if Mr. Allen wants to provide financial services after his ban expires he will need to acquire the relevant qualification, pass an exam and do a year of supervised work and training.
This serves as a good reminder that ASIC will be taking a strict view of what is required to comply with the new accreditation requirements, and that it will treat bans as a clear “circuit break” rather than a “suspension”.
A Perth financial adviser, who appealed a decision by ASIC to ban him, has failed in an appeal to the Administrative Appeals Tribunal.
Jason Atkins provided advice to clients to establish SMSFs and use limited recourse borrowing arrangements to fund the purchase of real property.
ASIC found that Mr. Atkins had not acted in the best interests of his clients. ASIC said it was concerned that Mr. Atkins did not investigate or consider whether investing in property via an SMSF would outperform his clients’ existing superannuation fund or improve their retirement position.
The AAT said that:
- The adviser “facilitated a high-risk investment strategy for the clients whereby all of the clients were in a worse financial position than if they had done nothing and not followed his advice”.
- The clients were left with “a single property as the sole asset in their superannuation funds, leaving them in a precarious position, for instance: if the market were to drop; if the property were to be untenanted; or if the clients otherwise have cash flow problems, such as in the case of a redundancy.”
ASIC pointed out that, even where a client approaches an adviser with an interest in a particular strategy, the best interest’s duty requires the adviser to use their expertise to conduct a reasonable investigation into the financial products that may put the client in a better position.
The duty to act in the best interests of the client appears in section 961B of the Corporations Act 2001. Most advisers follow the “safe harbour” steps appearing in that section, to demonstrate that they have met the duty. The relevant safe harbour step requires the adviser to:
- [Conduct] a reasonable investigation into the financial products that might achieve those of the objectives and meet those needs of the client that would reasonably be considered as relevant to advice on that subject matter.
This investigation will typically include investigation into a financial product already held by the client, such as their existing superannuation holding.
Message 1: If your business model relies heavily on recommending that clients move into SMSFs, rethink it. High numbers of recommendations to establish SMSFs flag a risk that each recommendation may not be in the best interests of the client.
Message 2: If your business stand to gain by the client setting up an SMSF – say, by providing ongoing investment advice to the fund, or by providing compliance services through a related accounting firm? If so then any recommendation to establish an SMSF must ensure that the client’s interests are prioritised over the interests of the licensee, adviser and their associates, in accordance with section 961J of the Corporations Act 2001. This conflict of interest should also be addressed in your conflict of interest register – this would include referral arrangements from mortgage brokers looking to set up a limited recourse loan.