Adviser bias disclosure leads Hayne recommendations
Introducing new laws to disclose an adviser’s lack of independence is one of a number of key recommendations the Hayne royal commission has highlighted in its final report.
The final report recommended the law should be amended to require that a financial adviser who would contravene section 923A of the Corporations Act by assuming or using any of the restricted words or expressions identified in section 923A(5) (including ‘independent’, ‘impartial’ and ‘unbiased’) must, before providing personal advice to a retail client, give to the client a written statement (in or to the effect of a form to be prescribed) explaining simply and concisely why the adviser is not independent, impartial and unbiased.
In response, the government agreed with the recommendation, requiring advisers to “provide a written statement to a retail client explaining why the adviser is not independent, impartial and unbiased before providing personal advice, unless the adviser is allowed to use those terms under section 923A of the Corporations Act 2001.”
Mr Hayne noted that, by itself, simple disclosure of conflicts of interest is insufficient as a means of managing them.
“The whole regime of disclosure presupposes that what is given to a consumer in writing will be read, and if read, will be understood,” he said.
“Often, that presupposition is wrong. And given the length and complexity of FSGs (financial services guides) and PDSs (product disclosure statements) that is unsurprising. Further, as Professor [Sunita] Sah explains in her research paper, disclosure of conflicting interests may fail as ‘a discounting cue for biased advice, it may even make matters worse’.”
Mr Hayne noted that, currently, advisers will contravene section 923A(1) of the Corporations Act if they use words such as ‘independent’, ‘impartial’ or ‘unbiased’ in relation to the financial services he or she provides unless all of the following are satisfied:
- The financial adviser does not receive:
- commissions (other than commissions rebated in full to the client);
- any form of remuneration calculated on the basis of the volume of business placed by the adviser with a product issuer; or
- any other gift or benefit from a product issuer that may reasonably be expected to influence the adviser.
- Neither the financial adviser’s employer, nor any person on behalf of whom the adviser provides financial services, receives any of those benefits;
- The financial adviser operates free from direct or indirect restrictions relating to the financial products in respect of which he or she provides financial services; and
- The financial adviser operates without any conflicts of interest that might:
- arise from his or her associations or relationships with issuers of financial products; and
- be reasonably expected to influence the adviser in carrying on a financial services business or providing financial services.
Mr Hayne noted that, at present, there is no requirement for a financial adviser who doesn’t satisfy those requirements to explain to a retail client that they are not independent.
He said a client may be able to infer that fact from some of the matters disclosed in an FSG. However, in Mr Hayne’s view, this is not sufficient.
“A financial adviser who does not meet the requirements set out above and who provides personal advice to a retail client should be required to bring that fact to the client’s attention, and to explain, prominently, clearly and concisely, why that is so,” Mr Hayne said.
“I consider that disclosure of that kind is likely to be more readily understood by, and therefore more useful to, a client than the existing requirement merely to disclose, in general terms, certain information about the providing entity.”
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