When the "best interests" duties contained in the Future of Financial Advice (FOFA) reforms become law, the lack of a legal precedent will see the Financial Ombudsman Service (FOS) effectively "swimming in the dark", according to Argyle Lawyers principal Peter Bobbin.
In practical terms, court cases "predict the past" because they are based on events that happen three to four years before the judge makes a decision, he said.
"What FOFA will do is create a skeletal frame. It’s not until the issues actually come before the courts that we’ll get the ‘meat’. So FOS will be swimming in the dark for at least three to four years," Bobbin said.
FOS will still attempt to apply FOFA in a proper legal manner, he added – it just won’t have any guidance to do so.
Minter Ellison partner Maged Girgis said while FOS was not a court, and was guided by a "fairness" principle rather than the strict letter of the law, it still had to operate within the framework of the legal system.
"Once you narrow that framework down – so that a planner needs to have done certain things – it would be easier to find, I suspect, that if the person hasn’t done one of those things then that would be sufficient [for FOS to find in the complainant’s favour]," Girgis said.
There are two separate duties in the FOFA draft legislation: the duty to act in the best interests of the client, and the duty to give priority to the interests of the client before those of the licensee. On top of that, there are 12 steps that planners must take before giving advice.
"[FOFA will] create more hurdles that a planner has to take in defending a claim before they can even start to argue about the other concept of ‘fairness’," Girgis said.
One big complaint from planners in the past has been that there is no avenue for them to appeal a FOS decision. But Bobbin said it was possible to appeal to the Federal Court on a "legal jurisdictional issue".
"I would anticipate in the early days of FOFA there may very well be a few appeals. Because no-one – not even FOS – knows what ‘best interests’ means," Bobbin said.
Australian Financial Services head of compliance Michael Butler said the 12 steps contained in the FOFA draft legislation would see the industry going back to the days of "ticking a box" and moving away from focusing on the individual needs of the client.
"That’s the fear of most people – that it’s going to end up being totally process driven," he said.
Association of Financial Planners chief executive Richard Klipin said the FOFA regime and the best interests duty currently in the draft legislation would create more avenues for litigation.
"It will be a new world. There will need to be common sense prevailing and guidance from the regulator," Klipin said.
