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Best interests duty extends to cryptocurrencies

Best interests duty extends to cryptocurrencies

Financial advisers will need to be well versed in cryptocurrencies such as bitcoin and ethereum despite them not being considered financial products, a compliance consultant has warned.

Speaking to ifa, Assured Support principal Sean Graham said the increasing popularity of cryptocurrencies poses a number of challenges for financial advisers.

“The problem is that it’s mums and dads jumping into it at the moment, and from conversations I’ve had with advisers, they feel under pressure from clients who want to chase that growth or are asking them to do it,” he said.

According to Mr Graham, while cryptocurrencies are not classed as financial products under most circumstances, advisers still need to be aware of how their clients intend to use them and discuss the risks associated with doing so.

“If you’re an adviser who doesn’t want to recommend cryptocurrencies but your client comes and asks you to include them in the portfolio, then you have a best interests duty to address that,” he said.

“That might be to warn them of the risks and dangers of cryptocurrencies or the limitations, and I don’t think that’s necessarily being done.”

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Equally, Mr Graham said, advisers who do want to recommend cryptocurrency investment to their clients should be wary that they may come under greater scrutiny from ASIC moving forward.

“There are some advisers saying they can recommend it because it’s not a financial product, well, it may be in some circumstances and if you read the tea leaves, it’s going to be more highly regulated in the future,” he said.

“The reality is that everything is okay when prices are going up, everything’s sailing along and no-one complains, but once the bubble bursts, if and when it does, and people start to lose money, those clients are going to be the ones that are arguing they weren’t adequately informed and should have been warned.”

Cryptocurrencies may also pose a risk for advisers’ professional indemnity insurance coverage, Mr Graham said, as many PI policies exclude cover for non-financial products.

“We don’t know exactly how it’s going to work because it’s never been tested, and realistically you don’t want to be the first one to test it,” he said.

How likely are you to recommend cryptocurrency investment to your clients? Have your say in the latest ifa straw poll: https://www.ifa.com.au/polls/46-how-likely-are-you-to-recommend-cryptocurrencies-to-your-clients

Sean Graham will be speaking at the ifa Business Strategy Day in March. For more information visit https://www.ifa.com.au/business-strategy-day

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