Beware of pitfalls of safe harbour provision: Consultant

Advisers seeking to use the safe harbour provision might be caught out not complying with their legal obligation to act in the best interests of their clients, notes a financial services lawyer.

If an adviser/licensee chooses to rely on the safe harbour provision in order to demonstrate compliance with the best interests duty, The Fold Legal solicitor director Simon Carrodus noted three main areas where advisers get it wrong:

  1. Failure to demonstrate adequate product research (in particular the client’s existing product);
  2. Inadequate documentation and/or explanation of why the advice is in the client’s best interests; and
  3. Failure to link each recommendation to the stated needs and objectives of the client (i.e. advice looks generic and product-centric, rather than client-centric).

Mr Carrodus said the three areas of failure tie into the obligation to provide advice that is appropriate for the client, taking into account their needs, objective and circumstances.

“At a minimum, you must explain how your advice addresses the client’s needs and objectives and why it’s likely to leave the client in a better position,” he said.

“This should be documented on the client files and summarised in the SOA.”

In addition, Mr Carrodus noted that the safe harbour provision might not provide much protection with respect to compliance with FASEA Code of Ethics Standard 2.

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The explanatory statement in the standard notes that “even if you follow the steps set out in section 961B of the Act, you may still not have complied with the duty under the code to act in the client’s best interests,” Mr Carrodus said.

“So while the safe harbour provision was designed to provide advisers with a degree of certainty with respect to the best interests duty, we don’t believe it provides as much protection as many advisers and licensees think. 

“Our view is that using a safe harbour ‘checklist’ alone is probably not enough – it really should be combined with an assessment of the appropriateness of the advice provided.”

Beware of pitfalls of safe harbour provision: Consultant
Simon Carrodus
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Adrian Flores

Adrian Flores

Adrian Flores is a deputy editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.

You can contact him on [email protected].

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