Plan to escape the legal traps

As risk planning remains a hot topic in the financial advice space, Malavika Santhebennur explores the top 10 legal quandaries planners can find themselves in and how to avoid them.  

The financial scandals that have plagued the likes of the Commonwealth Bank of Australia (CBA) and Macquarie Bank resulted in the Australian Securities and Investments Commission (ASIC) increasingly focusing on clamping down on poor culture, revving up monitoring and surveillance of financial advisers, and encouraging compliance.  

ASIC deputy chairman Peter Kell addressed a risk management conference in September, where he said culture is vital in areas like remuneration and incentive structures for employees, as well as how products are developed and marketed. 

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"If a licensee has a poor culture of compliance, there are likely to be breaches of the law," he said. 

Poor compliance, culture, and monitoring and surveillance are just some of the legal traps that financial planners need to be aware of. 

Planners also need to be aware of the liability of entering into an authorised representative agreement, keeping client books, keeping good meeting notes and much more.  

Under the Future of Financial Advice (FOFA) reforms, planners need to be aware of the best interest duty. 

Money Management goes through the top 10 legal traps financial planners can fall into, and how to escape the traps. 

1) Compliance 

Compliance figures at the top of the list for ASIC and many of those in the legal profession. In his speech at the risk management conference, Kell said poor compliance could mean a licensee is breaking the law, and could have lasting effects due to the long-term nature of products and services. He added good compliance culture starts at the top - by the board and executives in an organisation.    

Hall & Wilcox Lawyers Harry New points out that ASIC is increasingly prepared to take action and make examples, where it has suspended and cancelled financial planning licences for failing to lodge audited accounts on time. 

He also noted organisations must have written policies that are reflective and adaptive of that particular business. 

"We often see that the financial planner might obtain a licence and demonstrate to ASIC that they've got policies in place but they're sort of off-the-shelf policies, which haven't really been thought about in the context of the planner's business," New said. 

2) Breach reporting 

Part of having a culture of compliance involves licensees having an acute awareness of their breach reporting obligations, and they need to be reported in a timely way if those breaches are significant. Kell made it a point to talk about breach reporting in his speech, and New wondered if those arose out of the Senate inquiry on rogue advisers, and whether it is part of ASIC's "proactive surveillance activity". 

Financial services law firm The Fold Legal's managing director Claire Wivell Plater recently said fear is preventing financial planning organisations from breach reporting, rather than poor culture. She said some businesses have a rule that they cannot report breaches until the directors or an external lawyer has considered it. 

But she and New stressed that just because an organisation reports a breach does not mean ASIC will act on it. Wivell Plater added that fear itself can be indicative of poor compliance culture because failing to report a breach is a breach in itself.   

They said ASIC will give organisations an opportunity to address breaches once they have reported them.  

3) Best interests duty 

While ASIC sets out guidance on the best interests' duty, which includes acting in the client's best interest, fulfilling the safe harbour for the best interest duty, providing suitable personal advice and putting the client's interest first, planners need to understand what this really means for them. 

Wivell Plater said the challenge lies in planners and advisers translating the definitions of the best interests duty into what they do on a day-to-day basis with their clients. 

She pointed out that there must have been a perception by ASIC that planners are not acting in their clients' best interests for the law to change on that. 

"Some existing adviser practices may not be in the best interests of the clients so advisers need to carefully examine the way that they're dealing with the clients to make sure the way they do things meets that test rather than just assuming that what they've done will always meet that test," Wivell Plater said. 

4) Authorised representative agreement 

Wivell Plater also warned advisers to give more attention upfront to the liability and exposure they open themselves to when entering into an authorised representative agreement. She said advisers need to pay particular attention to the extent of any indemnity  they are required to give the dealer.  

Advisers need to ensure that it is not a complete indemnity and that it has proportionate allocation of responsibility. This is so that if something is partly the dealer's fault, the dealer cannot claim full indemnity from the adviser. 

Advisers also need to check the extent of coverage of the professional indemnity insurance provided by the dealer.  

"We've seen a number of examples of professional indemnity insurance which gives broader coverage to the dealer than it does to the adviser and that can act to the adviser's detriment," Wivell Plater said.  

"The insurer could then use the indemnity in the authorised representative agreement to pursue the adviser for something that the licensee is covered for but the adviser is not covered for in the policy." 

5) Divorce risk 

Rockwell Olivier principal Peter Bobbin warned advisers of divorce risk, pointing out that the vast majority of planners will do financial planning for both a husband and a wife. Many of them will give advice under the husband's instructions, but put the assets in the wife's name in the belief that it is good tax and investment planning.  

If a couple divorces and the wife loses all the money invested due to something like a stock market crash, the wife might look to blame the financial adviser because the adviser did not take instructions from the person on whose behalf they were investing. 

"What the adviser needs is a retainer relationship whereby they get clear instructions that they are to act on behalf of her by taking instructions from him. If that bit of paper exists, the adviser is now protected," Bobbin said. 

He added that by making this point clear, the adviser could be empowering the wife by helping her understand she has rights in making investment decisions. 

"You're actually giving her an opportunity to say, 'actually, I don't like those tree plantations in the Southern tablelands. I'd rather be more conservative,' and that's a good thing." 

6) SMSF Binding Death Benefit Nominations 

A self-managed super fund (SMSF) trustee may expose him or herself to binding death benefit nomination (BDBN) disputes upon their death. If a trustee has authorised his second wife as successor to the SMSF, but has made a BDBN saying all the money should go to his children from his first marriage, this could lead to disputes if the second wife has an acrimonious relationship with the children. 

DBA Lawyers lawyer David Oon noted that if the BDBN is a matter of millions of dollars, then the spouse will have incentive to fight for it. 

"I'll try and find holes in the BDBN, pay a barrister, like a QC, $20k to try and argue why the BDBN is not valid," Oon said. 

The solution is not just for the trustee to make a BDBN, but to figure out who they want to be controlling the super fund once they die. If they want the money to go to the children, they may have to put the SMSF in the name of someone they trust will have the best interests of the children at heart. 

Having separate super funds from the second spouse may also be a solution so the trustee can make a BDBN to their kids. 

7) Superannuation 

If advisers are providing general advice to clients in an area as broad as superannuation, they must let the clients know in writing. Bobbin said advisers cannot afford the time and clients cannot afford to pay the adviser for detailed personal advice on their super. He said issues can arise in superannuation deceased estates, when clients seek to attack the adviser because their fathers' superannuation ended up with the fathers' new wife instead of their hands.  

"If you're giving advice to clients on something as potentially complex as superannuation and the complexity is only ever in the specific super, you've just got to make clear that you're giving general advice, not specific advice about their super, unless and until you actually give specific advice about their super," Bobbin said. 

8) Monitoring and supervision 

While it is easier to monitor advice adequacy with the provision of a financial services guide and a statement of advice, it is much harder to monitor the adequacy of the advice itself, especially because it is very expensive, according to Wivell Plater. 

"That's very time consuming and detailed work. It actually requires someone to go in and actually review the advice that was given, not just whether certain activities have been undertaken and I think that the regulator has become aware from their surveys of the quality of the advice that this is not something that is being adequately monitored," she said. 

The fact that ASIC surveillance continues to find sections of poor quality advice means whatever monitoring and supervision is in place is not resolving some of the problems.  

Wivell Plater acknowledges that problems could lie in a number of areas like mentoring, or advice templates. But assuming those are appropriate, she stressed that proper monitoring and supervision should pick up on whether advice is in the best interests of the client or not. 

9) Meeting notes 

This is not so much a technical thing, or a legal requirement, but is simply practical, according to Bobbin.  

"Some years ago I had a financial planner insurance fellow who had an issue regarding income protection insurance policy that he'd sold to a person. His file notes were able to completely prove that what he did was right and that the client, the complaining person was lying," Bobbin said. 

Notes must contain the basics such as the adviser and client's name, the mode of communication between the two (meeting, phone call), date and time.  

File notes must also articulate the gist of the discussion. While clients are issued with statements of advice, it might not necessarily capture all that is needed, and having file notes is a good safety measure.  

10) Over-marketing 

In 2008 six plaintiffs brought claims against the Westpoint group of companies after losing their money in various investments.  

In his District Court decision presiding Judge Justice Douglas McGill SC said "the whole point of people being financial advisers is that they hold themselves out as having some expertise in relation to potential investments, and that involves having an understanding of those investments, their advantages and disadvantages and the circumstances attending them..." 

In the same vein, Bobbin stresses that when financial planners are designing their marketing material on what services they offer, they should not overstate what they do and how they do it. 

"Don't use wonderful marketing words that seek to make you the bigger, better, brighter, and the newest best thing. If you say what you are, you'll be held accountable for what you are but only for what you are but if you say something more than that you've got a problem," he said.




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