Leadership not obstruction needed from ASIC on financial advice

The collapse of financial markets in the face of the COVID-19 pandemic is putting unprecedented pressure on financial advice. Yet financial advisors are facing unprecedented demand and increased regulatory delays in providing advice. The obvious solution – client directed advice – is inaccessible because of ASIC’s efforts to stamp it out.

Post Hayne Royal Commission constraints placed on adviser networks, in particular AMP, are only exacerbating this problem.

Financial advisors are between a rock and a hard place – risking the ire of the reimagined ‘tough cop on the beat’ ASIC, or delivering timely advice to clients. ASIC has made clear in recent campaigns that it wants the practice of client-directed advice stopped, but the ability to provide responsive and targeted advice is an obvious answer to the current dislocation, volatility and freefall of markets..

For example, ASIC’s Wealth Management Major Financial Institutions Portfolio (formerly the Wealth Management Project) which was established after the Hayne Royal Commission and targets advisors linked to the four big banks, Macquarie and AMP – has specifically targeted client-directed advice, which ASIC says is in breach of an advisor’s best interests duty to clients. This campaign alone has racked-up over 60 bannings and suspensions of advisors around Australia since 2018, with the base banning period being three years.

The problem is that the giving of client-directed advice is perfectly legal, despite ASIC’s view. In fact, the ability to give advice specifically targeted to a client’s requested needs, rather than lengthy, pro forma documented advice taking weeks to provide, might be precisely in a client’s best interests in a volatile market where the ASX has moved more than 3% in 15 of the past 18 trading days, and fallen by more than 30% since its peak on 20 February 2020.

In ASIC v AGM Markets Pty Ltd (in liquidation) (No 3) [2020] FCA 208, Justice Beach set out an 8-step process of how advisors can discharge their best interests duty. Crucially, Beach J accepted there are circumstances where limited (or client-directed) advice could be provided. In summary, the advisor:

1. Should undertake a thorough examination of the client’s current financial situation.
2. Should gain a clear understanding of the client’s objectives.
3. Should ascertain the type of products the client wishes to invest in or purchase.[1]
4. Ought to inform the client whether the advice was based on incomplete information regarding the client’s financial situation and objectives.[2]
5. Must provide a statement of advice (SOA) when, or shortly after, they provide advice to the client. The SOA should have clearly set out all of the details noted above.
6. The advisor should educate the client/s on the products being recommended. The client should have understood how the product works.
7. Should ensure that the client understand the risks involved with the products.
8. If applicable, should advise the client about investing in leveraged and high risky products [CFDs and FX contracts in the AGM case].

Client directed advice is not inconsistent with this framework. And if that’s the case, how is client directed advice not in a client’s best interests?

Adopting this framework, limited or client-directed advice can be provided to clients in response to a crisis.

And finally, ASIC ‘guidance’ is just that. Guidance. It’s not law, but reflective of the current reactive prism through which ASIC chooses to view the law.

In the current crisis, that prism needs to be abandoned. The RBA, Federal and state governments, industrial relations organisations have all stepped up.

Now it’s ASIC’s turn.

ASIC needs to issue urgent guidance confirming it will abide by the law and not claim a breach of the best interests duty where client-directed advice is provided consistent with Justice Beach’s safeguards.

This will allow financial advisors to focus on the core needs of their clients and provide advice that is needed right now, now.

[1] An advisor could recommend other types of products but had to have a reason for doing so based upon conversations with the client and an understanding of the client’s objectives. The client also had to be informed of the reasons why the advisor believed an alternative product would suit the client’s needs. The advisor had to be clear that the products being offered to the client were appropriate to that client and their needs and objectives.

[2] If so the advisor must advise the The advisor should have advised the client of why the information was incomplete and informed the client of the risks involved in acting on the incomplete advice. This would have allowed the client to make their own informed decision on whether to follow the advice provided.

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