FSCP hands down first ‘written reprimand’ around advice scoping

Tackling issues around inappropriate scoping of advice, the Financial Services and Credit Panel (FSCP) has announced a ‘written reprimand’ for the first time. 

Its latest case addressed the issue of a relevant provider recommending in a statement of advice (SOA) that the clients switch their superannuation from one fund to another, and transfer their life and TPD insurance (through super) to another provider.

Upon discovering the full amount of cover could not be transferred without further underwriting, the relevant provider did not revisit the advice but instead recommended in a record of advice (ROA) that the clients apportion their cover between the new and existing provider up to the maximum amount allowed without underwriting.

“Although the clients held life and TPD insurance in their existing superannuation fund, the relevant provider failed to consider their existing insurance or conduct an insurance needs analysis,” the panel said.

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“The advice was also inappropriately scoped being limited to superannuation products only when the clients were also seeking retirement planning advice.”

It determined that, in giving the advice, the relevant provider contravened s961B(1), s961G, s961J(1) and s921E(3) of the Corporations Act 2001 and failed to demonstrate the Code of Ethics’ values of competence and diligence, and breached Standards 2 and 5 of the Code of Ethics.

The resulting outcome was the panel’s first written reprimand, which is not published on the Financial Advisers Register. However, it is provided to the adviser’s licensee. 

Michael Miller, director at Capital Advisory, said a written reprimand implies that the impact for the client was “very low or non-existent”.

Its findings indicate that an adviser can scope advice but the decision must be made in the interest of the client rather than the adviser’s business strategy. An adviser must also consider the risk of what the advice excludes.

Finally, he commented, the presence of group risk insurance with automatic acceptance means a client’s super and insurance needs are often closely linked and trying to address one without the other is ‘high risk scoping’.

In another outcome, two weeks prior, the FSCP panel considered the case of a relevant provider who gave SOAs to three clients on the same day, adopting a layered advice strategy for each of the clients, in circumstances where it was not appropriate to do so.

It was unclear as to how the limited insurance advice scope was effective in each client’s circumstances without a contemporaneous assessment of their super, the panel said.

The relevant provider did not adequately consider the three clients’ objectives, needs and financial situation or base all judgements on their relevant circumstances.

“For example the client files showed the collection of minimal information about their debts and expenses and they lacked explanation as to the bases for the insurance covers recommended. 

“The relevant provider relied on generic, unsubstantiated reasons to support the recommendations for the replacement insurance products. All three clients appeared to be under-insured as a result of the relevant provider’s recommendations. 

“Further, when previously recommending the three clients rollover their superannuation funds, the SOAs did not include any product replacement information as it related to the clients’ residual superannuation balances, e.g. no comparisons of fees or risks, or identification of any benefits lost by closing their existing superannuation accounts.”

The panel determined the advice involved contraventions of sections 961B(1), 961G, 947D(2) and 921E(3) of the Corporations Act 2001. It also breached Standards 5 and 6 of the Code of Ethics.

As a consequence of this conduct, the panel issued a written direction similar to that of its second FSCP panel decision in June.

The relevant provider must engage an independent person to pre-vet and audit the next 10 SOAs that include a recommendation in relation to insurance; and the next 10 SOAs that include a recommendation in relation to superannuation, that the relevant provider intends to present to a retail client.

The relevant provider is required to provide the independent person’s findings as a result of their audit to ASIC, and the relevant provider will have to bear the cost of the supervision. 

Miller compared the FSCP’s verdict in this second case to four past ASIC actions around layered advice.

“What is interesting about this panel decision is that in the past ASIC has applied bans to advisers and responsible managers, and cancelled AFSLs for the use of a layered advice strategy on four separate occasions.

“Each of the four actions ASIC had itself applied indicated that the layered advice strategy was applied as a business rule to all clients of the individual/AFSL, so the difference in this case may have been that it was found to have been a case of inappropriate scoping for a few clients, rather than applied to all clients of the individual/practice.”