‘Gun-shy’ compliance focus ignores best interests duty

The narrow focus of “gun-shy” compliance staff on low-cost products could lead to advice being given to clients that is less, rather than more, compliant with best interests duty obligations, a financial services lawyer has said.

Speaking in an Implemented Portfolios webinar on Friday, The Fold Legal director Simon Carrodus said regulatory attitudes towards the best interests duty had become too focused on cost above all else, when higher cost products could actually be more in line with a client’s objectives in some cases.

“Saying every client should be in the cheapest product is like saying every person in Australia should be driving the cheapest car,” Mr Carrodus said.

“Some people need to tow a boat or lug heavy equipment, so they will end up in a big van; a university student that hasn’t got a lot of money and wants to live on the smell of an oily rag will end up with a small, cheap car.


“People have different objectives and ignoring those objectives and placing everyone into the cheapest product is like we’re back to where we started – it's the same outcome as what caused all these ASIC investigations, which is this cookie-cutter advice which is not tailored to the client.

“A lot of clients have more sophisticated and complex needs, so by trying to place every client into the cheapest product, you're probably failing the best interest duty.”

Mr Carrodus added that the focus on low-cost products was mainly being driven by “gun-shy” compliance staff at large institutions who were overly conservative in their outlook because of remediation penalties incurred in the past.

“This is not adviser driven, it is driven by compliance teams who are gun-shy and conservative after the royal commission, who had to throw a lot of financial resources to remediation and now want to cover themselves,” he said.

“The intentions are good, but the outcome can be poor if you have a client with sophisticated needs who isn’t having those needs met because an adviser is complying with a direction from their compliance team to always recommend the cheapest product.”

Mr Carrodus added that as long as the adviser was clearly able to document why a more expensive product was in the client’s best interest, recommending the product would not go against their compliance obligations.

“Anyone that says you can't switch a client to a more expensive product in absolute terms is wrong, there will always be cases where it's possible,” he said.

“If it’s a few basis points more and the client is comfortable paying that extra amount to get a product that best satisfies their needs and objectives, that is in their best interests.”

‘Gun-shy’ compliance focus ignores best interests duty
Simon Carrodus
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