Client-first rule softened - why?
New Zealand rules around advisers’ obligation to put their clients’ interests first have been watered down in the new iteration of the law.
Tuesday, January 30th 2018, 6:00AM 
10 Comments
by Susan Edmunds
Under the Financial Services Legislation Amendment Bill that is before select committee, advisers will work under a duty to give priority to a client’s interests.
In the previous version of the bill, they had been required to put a client’s interest first.
In Australia, a recent court case between ASIC and NSG Services tested that country’s standard, which requires advisers to act in the best interest of clients.
Barrister Merran Keil said it proved, among other things, that advisers’ processes mattered, conflicts needed to be identified and managed, they needed a compliance programme, and, crucially, they needed to be able to consider more than one product.
Lawyer Jeremy Muir, of Minter Ellison Rudd Watts said the same considerations applied in New Zealand.
He said the question of how many products were being considered was a contentious one.
“Are advisers required to advise on all products or at least to point out the deficiencies in the universe of products they can advise on? Where does their obligation end?”
He said the FSLAB obligation was softer than the ASIC one.
“[The ‘priority’ obligation] is saying you can’t put your or your employer interest ahead of clients’, not that you have to come out with the best possible result for clients in every case.”
The new code of conduct, covering all advisers, would fill in some of the gaps in the broad brushstrokes of the legislation, he said.
His colleague, Jane Standage, said tied advisers could satisfy their obligation by informing clients that they could only advise on a limited range of products, and showing that a reasonable adviser would be satisfied it was in a client’s interests to recommend a product.
“The client-first duty has been softened but you can’t advise someone to take up your product when it’s not in their interests to do so.”
Muir said it would take time to work out what the difference was MBIE was trying to make compared to Australia. It could be that they were trying not to “tie advisers up in knots” when they could not do advice across the board.
“Even under the Australian regime, ASIC recognises there’s a way to act in the best interest of clients and still be a tied adviser,” Standage said.
An MBIE spokeswoman said the duty was amended to reflect submissions.
"This duty in the bill remains limited to conflict management, recognising that other standards of conduct and client-care sit in the Bill (e.g. to exercise care, diligence, and skill) and will sit in the new code of conduct. The duty has been amended to apply if there is a conflict between the interests of the client and the interests of the person giving advice or any associated person (as defined in the Financial Markets Conduct Act 2013). The wording in doing anything in relation to the giving of advice has been removed."
She said anyone with feedback should make a submission to the Economic Development, Science and Innovation Committee.
The standard, as it was previously worded, was queried by product providers, who said it was difficult to prove insurance advisers were not influenced by commission and that a general duty could require advisers to go outside the agreed scope, if that was in a client’s best interest to do so.
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Starting with the comparison to Australia, over the ditch there are two separate legislative provisions (1) to act in the best interests of the client and (2) to give priority to the interests of the client. What “best interests” is is not defined, but the legislation provides a procedural “safe harbour” – if the adviser follows the guidelines, then they should be safe. NSG’s problem was that their procedures did not follow the safe harbour guidelines, and were held to be in breach of “best interests” duty.
Turning to NZ, which matters more as it is these rules with which NZ advisers must comply. We don't have both these Aussie requirements.
The requirement to put the interests of the client first was imposed under Code Standard 1. As lots of prior debate on these pages shows, there is/was no consensus on what that means.
When FSLAB was first printed in Exposure Draft form, this concept was converted to legislative form. The heading of the relevant duty section was “Duty to put client’s interests first”. In the body of the section however, these words were not used again – the proposed section said
431H Duty to put client’s interests first
(1) This section applies if a person who gives regulated financial advice (A) knows, or ought reasonably to know, that there is a conflict between:
(a) the interests of the person to whom the advice is given (B); and
(b) A’s own interests or the interests of any other person.
(2) In giving the advice or doing anything in relation to the giving of the advice, A must give priority to B’s interests, including by taking all reasonable steps to ensure that the A’s own interests or the interests of any other person do not materially influence the advice.
When the Bill was introduced to the House, the heading of the section (renumbered to 431J ) had been changed to “Duty to give priority to the interests of the client”.
431J Duty to give priority to client’s interests
(1) This section applies if a person who gives regulated financial advice (A) knows, or ought reasonably to know, that there is a conflict between—
(a) the interests of the person to whom the advice is given (B); and
(b) A’s own interests or the interests of a person associated with A.
(2) In giving the advice, A must give priority to B’s interests, including by taking all reasonable steps to ensure that the advice is not materially influenced by any of the following:
(a)A’s own interests:
(b) the interests of a person associated with A:
(c) if A is a financial adviser or nominated representative,—
(i) the interests of the financial advice provider on whose behalf A is acting (C):
(ii) the interests of a person associated with C.
Section (1) was unchanged. Section (2) saw the reference to “doing anything in relation to the giving of the advice” dropped and an amplification of influence.
I queried (with non official sources) the change in the Heading at the time and wise counsel pointed out to me that the new heading better reflected the wording of the section. Those were simply the words actually used in section (2).
So the better explanation is that rather than being a watering down, the change was made to better reflect the actual content section (2) of the clause.
So IMO the theme of your story is a rabbit hole.
Murray’s comment might illustrate this problem – he is able to quote the law but he ignores the fact that any reasonable person with the benefit of only half a brain and no knowledge of the law would define putting clients’ interests first as picking from the entire universe of products and choosing the one that best suits the client. Indeed, and Murray did you miss this, the judge’s comments in the NSG case highlighted the need to consider more than one product. The judge’s comment, reflecting reality, are a rare example of a commonsense ruling on the topic and stand in sharp contrast to our local FMA’s view that choosing the least worst product from a limited portfolio of high cost instruments that the Super Fund wouldn’t go near is “putting clients’ interests first”.
It will be very interesting to see if the new Labour Government moves to bring some commonsense to the law on this topic. Certainly we have more hope from them than the previous aspirants to jobs in the banking sector.
If there has been any dilution of the concept of client interest first, clients best interest, etc., it is because VIOs cannot satisfy the intent.
VIOs manufacture products for sale; they retain employees and/or contractors to sell their in-house products. That's the objective with which the employees/contractors are tasked first and foremost. Nothing to do with putting the clients' interest first, or serving the clients' best interest. They are retained to sell products and the consumer should expect to be able to identify clearly, immediately, and unequivocally that a sale transaction is being presented.
Disclosure is insufficient to achieve this - see ASIC's actions against Australian Banks - and proper inclusion of Sales as a regulated activity in FSLAB should be added.
The distinction between a sales transaction and financial advice should be clearly enunciated and those contracted to sell products so designated.
I also have an issue with lawyers in private practice in the larger firms commenting on Financial Services legislative matters. These legal firms all either appear on the approved list of firms for BEOT to engage with, or act on behalf of BEOT in some capacity or other, giving rise to fundamental conflicts of interest.
By your definition, I am not a "reasonable person" because I don't believe that putting the clients interests first automatically means that all advisers should have to choose from the the universe of products and only advise purchase of the best. [I actually doubt that that would be practically achievable, but that's no central to my view.]
I do however believe that where an adviser is choosing from a restricted subset, that needs to be clearly disclosed to the client - absolutely no argument there.
I have this morning had a quick skim through the judge's decision in ASIC v NSG, but actually couldn't spot the place where the judge said that an adviser needed to consider more than one product. Perhaps you could point me to the paragraph where the judge said that.
Lest I be understood, at the end of the day, I don't care what the rules are so long as they are clear to all.
Imagine the chaos there would be on the roads if there were no numerical speed limits but simply a requirement that said motorists had to "stick to a speed that was reasonable in all the circumstances."
There are lots of paragraphs where the judge notes that the advisors have not considered alternate products eg 27(d), 67(c), 164 (b), 165 (d), 67(c).
I’m going to have a good look at the findings and will probably write something on it sometime soon.
The 5th item in the Australian best interests safe harbour procedures (Corporations Act s961B(2)(e) says that:
“If, in considering the subject matter of the advice sought, it would be reasonable to consider recommending a financial product, an advice provider must -
Conduct a reasonable investigation into the financial products that might achieve the objectives and meet the needs of the client that would reasonably be considered relevant to the subject to the advice.”
ASIC set out its guidance on this matter in RG175 which was published 14 November 2017 (after the judgment in ASIC v NSG).
In RG 175.325 ASIC says “A reasonable investigation conducted under s961B(2)(e) does not require an investigation of every product available. However if a client requests that an advice provider consider a specific financial product, the advice provider must investigate that financial product”
Where the advice is to switch an existing financial product, ASIC say that the advice provider has to investigate both the existing financial product and the new financial product [RG 175.340]. That makes sense to me.
But nowhere does ASIC say that the advice provider has to investigate all financial products to comply with “best interests” duty.
Thanks for the references. Isee now where you were coming from.
But they are not sections of the judgment but rather are sections of the ASOF (Agreed Statement of Facts) "negotiated" by ASIC and NSG.
The Judge did not write everything in the ASOF into his judgment as reasons for his decision, so you can't say that he accepted every single statement in the ASOF as being right.
So respectfully I do not think your statement that "the judge’s comments in the NSG case highlighted the need to consider more than one product" is a correct statement of the law.
https://www.ifa.com.au/news/18826-vertical-integration-makes-clients-the-ultimate-loser?utm_source=IFA&utm_campaign=30_01_18&utm_medium=email&utm_content=2
Yes I think you are right there but the fact that they didn’t consider alternative products is one of the reasons the clients were disadvantaged and they were hit with that A$1m fine. I am guessing that even if their compliance and training had been deficient but they had done the right thing by clients they wouldn’t have got hit with such a big fine. I think the FMA has alluded to this sort of stance itself – on the basis that even if your training isn’t up to scratch but you somehow manage to do the right thing by clients you will not get too heavily censured.
Thanks again
Regards
Brent
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In Nov 2017, the Turnbull Government announced a Royal Commission into the alleged misconduct of Australia’s banks and other financial services entities, noting that "...consumers have the right to be treated honestly and fairly in their dealings with banking, superannuation and financial services providers. The highest standards of conduct are critical to the good governance and corporate culture of those providers..."
A more robust approach is to put the interests of consumers first.