Here’s what Australian advisers need to know about complying with ASIC’s s923A clarification.
A fair amount of debate has been had regarding the use of restricted words such as 'independent' and phrases to that effect in Australia. As far back as a media release in May 2012, ASIC has been warning financial services licensees about the use of the term ‘independent’. It can be said that the key issues are conflict and ownership in the independence debate and therefore for better or worse a level of certainty is created for licensees and the industry when a regulator provides its position on an issue.
The issue here in using the words ‘independently owned’, ‘non-aligned', 'non-institutionally owned’ and the like, which may be factually correct when describing the way that the financial advisory business has been set up, may not satisfy the test for independence as set out in the Corporations Act or satisfy the regulator.
In order to avoid customers potentially being mislead into believing that a financial adviser is “independent and free from influence”, ASIC in its media release (27 June 2017) clarified its position on the use of 'independently owned' under s923A of the Corporations Act. ASIC’s position is that words such as 'independently owned', 'non-aligned' and 'non-institutionally owned', and other similar words or expressions, can be used only if a financial adviser satisfies the conditions set out in s923A.
ASIC has said that it will provide a facilitative compliance period of six months so that advice firms that do not satisfy the conditions in s923A can change websites and other documents to take out terms such as 'independently owned', 'non-aligned' or 'non-institutionally owned'. This facilitative period will not apply to contraventions that include the use of the terms ‘independent’, ‘impartial’ and ‘unbiased’.
If it’s any consolation, this new state of affairs is similar to that in many other jurisdictions. In countries such the US and UK, there is a legal distinction between independent advisers and product aligned advisers. Other countries use a principles-based system and reasonableness test.
For instance, in New Zealand guidance relating to the use of the word independent is found within the Code of Professional Conduct for Authorised Financial Advisers and states, “An authorised financial adviser must not state or imply that the authorised financial adviser is independent, or that any financial adviser services provided are independent, if a reasonable person in the position of a client would consider that the authorised financial adviser or the services provided are not independent.”
Similarly, Singapore has introduced legislation such as the Financial Advisers Act in 2001 (implemented in 2002) and associated regulations. The relevant Singaporean regulator has provided guidelines on the use of the term “independent” by financial advisers. One such guidance is that financial advisers that can clearly demonstrate that they do not have financial or commercial links with product providers that are capable of influencing their recommendations should use the term “independent” and it operates free from any direct or indirect restriction relating to any investment product that is recommended.
If a financial adviser does not receive any commissions or volume-based payments, or other gifts or benefits and has no conflicts of interest or influence from any product issuer, then they can describe themselves as being 'independently owned'.
What about providers who receive asset-based fees?
These advisers can use restricted terms such as 'independent' because asset-based fees are not considered forms of remuneration calculated on the basis of the volume of business placed by the person with the issuer of a financial product i.e. is not captured by s923A.
Does the use of an approved product list (APL) mean that you cannot use the word ‘independent’?
It depends. Under s923A(2)(d) of the act, imposing an APL on a financial service provider could constitute a direct or indirect restriction, meaning that a restricted term under s923A cannot be used. The very nature of an APL, which limits a representative from recommending products not on the APL, is restrictive.
However, assuming that all other conditions of s923A are met, the use of terms such as independent will depend on the operation and breadth of the APL i.e. an APL that consists of an open list of products and or where there is a simple and easy process to recommend a non-APL product, it is less likely to prevent an adviser from stating that they are independent.
What does this mean for clients and your business?
In ASIC’s media release, deputy chairman Peter Kell stated that, "The independence of financial advisers is an important issue for consumers and investors, and may sway their decisions about their investments or their choice of adviser. Consumers must not be misled into believing that an adviser is independent and free from influence when that is not the case."
Customers will have increased transparency, disclosure and consumer protection, further enabling them to make informed decisions with regard to the type of financial adviser that they choose.
Some financial advisers may wish to use the word 'independent' in their business names or in respect of their provision of any financial advisory service. They may also wish to promote or advertise their services as being 'independent. However, the use of the word 'independent' by a financial adviser has strong connotations. Independence suggests that the financial adviser operates with impartiality and objectivity, and does not have any potential conflict of interest or is restricted when recommending an investment product or strategy as a result of commercial or financial links with a product provider.
Financial advisers who currently comply with s923A, as now clarified by ASIC, are well positioned to promote the benefits of receiving independent and unrestricted financial advice and may possibly be in a position charge a premium for such a service.
Financial advisers will need to:
Consider the ‘relative degree’ of independence that is suitable for them, how important this is to their client base and how to best communicate this to their customers.
Evaluate their business model and client base both now and into the future and how they communicate their customer value proposition.
In light of global and domestic trends, assess their business sustainability and value chain and decide if the commercial value of using restricted terms such as those described above is aligned with their longer term strategy and the direction of the financial planning industry.
Nikolas Kloufetos is director of Advice Compliance Support
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