The drafting of best interest duty provisions within the Future of Financial Advice (FOFA) legislation and the requirement for financial planners to go beyond their approved product lists (APLs) carry professional indemnity risks for clients, financial advisers and licensees.
That is the assessment of dealer group Professional Investment Services (PIS) which has used a supplementary submission to the Parliamentary Joint Committee (PJC) reviewing the FOFA bills to point to the problem.
Citing sections s961B(2)(e) & s961D of the draft Bill, the PIS submission says it requires the financial adviser to "conduct a reasonable investigation into the financial products that might achieve the objectives and needs of the client", but goes on to say this may involve going beyond an APL.
However, the PIS submission warns that a requirement to consider products beyond those included in an APL "introduces two significant risks which will adversely impact clients".
"Firstly, from a research perspective, which is an essential component of the risk management process, products not on the APL will not be supported by the necessary levels of research which commonly consists of a three layer research process, external research by a third party research provider (such as a research house), research at the licensee level satisfying internal research requirements and research at the adviser level," the submission said.
It claimed that under the proposed requirements of the Best Interest Duty, financial advisers would be required to disregard external and internal research requirements and consider products which are not supported by the necessary research.
"This represents significant research and compliance risks to clients, advisers and licensees.
"It is difficult to foresee how an adviser can properly review each product the client may request it to consider, particularly where the product is at risk of not having any research, transparency issues (eg, investment selection within some industry funds where visibility through to investment selection can be extremely difficult), and may have no third party research or APL approval (which then means that the product is also not supported by internal review and research process)," the PIS submission said.
"This requirement in itself makes it hard to satisfy the best interest duty and undertake reasonable investigation when there is no knowledge, in depth research and review of the product," the submission said.
It said the second significant issue was that a product that was required to be reviewed which is not on the APL "will not be supported by professional indemnity insurance, and any review or consideration of such a product will mean that the advice covering that product is not covered."
