Paul Resnik

FinaMetrica has welcomed the Australian Securities & Investment Commission’s (ASIC) inaugural Strategic Outlook, in which it has identified financial advisers as a “high risk area” for consumers. ASIC will target advisers in its surveillance program in 2014-15.

ASIC said in its recently released Strategic Outlook that it is concerned by gaps “in core areas of [consumer] financial literacy, such as keeping track of finances, planning ahead, and understanding risk and return.”

FinaMetrica Co-Founder Paul Resnik said ASIC’s statements should cause some advisory firms to question the effectiveness of their communication practices about risk.

“The Federal Government and Parliament have increased their focus on the advisory profession and we hear that many advisory firms are beginning to review the quality of their advice and the way they explain risk to clients,” said Mr Resnik.

“We welcome this closer scrutiny. Advisory firms have been navigating The Future of Financial Advice (FoFA) reforms over last several years and the largely conflicted remuneration objectives of those reforms and consequently can no longer be regarded as a global role model for client-centric advice,” Mr Resnik said.

“For example, the financial services industry as a whole provides risk and return illustrations to prospective investors which often downplay downside risk, particularly the likelihood of outliers or rare events, while focusing on upside potential. Financial advisors often rely on these illustrations when explaining risk to clients. The end result is that many clients take on more risk than they are naturally comfortable with, or are over exposed to risk and don’t understand the risks they have taken.

“FinaMetrica’s Risk and Return Guide can be used by advisers to educate clients about investment risks and radically diminish this problem. FinaMetrica provides historical performance reports (for 40-plus years) for a representative set of 11 illustrative asset allocations, ranging from very conservative to fully growth-asset exposed. These user-friendly reports help educate clients so that they have realistic return expectations based on their tolerance for financial risk. As a result, they are less likely to be unpleasantly surprised by what happens to their investments when markets fall.”

Mr Resnik said advisers also needed to work harder to identify consumer financial needs in order to give suitable investment advice.

“ASIC has acknowledged in its Strategic Outlook that weak compliance systems and poor cultures, as well as vertical integration, can compromise the quality of financial advice. An adviser’s conflicts of interest and lack of competence can lead to investors being advised to buy products which are not suitable taking into account their needs and risk preferences,” Mr Resnik said.

“Advisory firms should have policies and procedures in place to ensure that customers’ needs are at the heart of their business and that their advisers comply with their legal obligations.

“The adoption of FinaMetrica’s Five Suitability Proofs by advisory firms would work well as asafeguard for consumers. The Five Proofs are the key steps advisers should follow to confirm they have delivered relevant and personal financial advice. They are:

1.         Prove you know the client’s circumstances, needs and aspirations

2.         Prove you have explored alternative financial behaviours and strategies

3.         Prove you know the products and services being recommended to a client

4.         Prove you have explained to the client the risks in the plan and the products through which the plan will be implemented

5.         Prove you have received the client’s informed consent to the risks in the plan.

Mr Resnik said the “enhanced, industry-wide public register of financial advisers” which the Federal Government will establish by March 2015 could help to improve consumer confidence in the financial advice industry. However, this alone would not prevent advisers giving unsuitable advice.

“A greater cultural change is needed. Consumers’ needs must be elevated to a priority if we want Australians to value and take our financial advice,” Mr Resnik said.

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Jaime Lumsden Kelly

Preparing to apply for a limited licence from the Australian Securities and Investments Commission (ASIC) should be taking accountants as long if not longer than the licence application process itself, according to The Fold Legal (The Fold).

“Material deficiencies in both the documentation and the information provided by applicants were the main reasons given by ASIC for approving fewer than half of the limited Australian Financial Services (AFS) licence applications lodged by accountants in the first half of the year,” says The Fold’s Senior Lawyer, Jaime Lumsden Kelly, “So it’s clear that rushing the process, or applying before you are really ready increases the risk of a poor-quality application and consequently rejection by ASIC.”

ASIC approved only 27 of the 62 applications for a limited AFS licence lodged before July 2014.

“Accountants should be clear about the authorisations they require for the services they provide and make sure they have completed the required RG146 training for the products they intend to provide advice on,” she says. “It is also important to check the adequacy of their professional indemnity insurance and consult a specialist broker if they are uncertain.”

The licence application process becomes much more streamlined if the financial information supplied to ASIC is correct and relates to the entity applying for the licence, according to Ms Lumsden Kelly. “If accountants familiarise themselves with the ongoing AFS licence obligations, things become simpler,” she says. “The application will ask how the accountant proposes to comply with the obligations. To complete it, they need to know what the obligations are and how they propose to manage them. Ideally, their compliance procedures would be in place before they apply; but they certainly need to be ready by the time their AFS licence is issued.

The Fold has released an AFS Licensee Manual, which provides guidance and procedures on these obligations.

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Cheree began her career with the Australian Investments & Securities Commission (ASIC) where she worked for over 13 years in supervisory roles before joining La Trobe Financial in December of 2003.

She soon found her niche in leading the investor liaison team in the growing retail Mortgage Fund operations which services over 10,550 retail mum and dad investors. This retail arm of La Trobe Financial is now the largest fund of its type in Australia with over $810 million of retail investments.

La Trobe Financial has also promoted Ms Caterina Nesci to Executive Head of Communications. Caterina an equally experienced operator has over 10 years’ experience working in various roles with a number of international organisations in Australia, London and Hong Kong.

In June 2010, she returned to Melbourne after working in Asia as Marketing & Events Manager. Caterina has worked very hard and shown a real passion with her work which is infectious. La Trobe Financial’s President & CEO Greg O’Neill commented that “Caterina has made a significant contribution with the company’s brand positioning, marketing and events and we all believe we are yet to see some of her greatest work.”

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Graeme Colley

Understanding the self-managed super fund lifecycle and knowing how to use that knowledge to benefit clients is the theme of the 2015 SMSF Professionals’ Association of Australia (SPAA) National Conference – the pre-eminent event on the SMSF calendar.

The conference, to be held in Melbourne at the Convention and Exhibition Centre from 18^–20 February, will be appropriately titled “Lifecycle” and boasts more than 36 conference sessions, 50 expert speakers, the world’s largest SMSF exhibition and numerous networking opportunities with like-minded professionals.

Graeme Colley, SPAA’s Director Technical and Professional Standards, who heads the National Conference committee, says: “Every year we face the challenge of making the national conference bigger and better than the year before.

“We know the importance that our members place on the National Conference in terms of technical content, industry updates, networking, and socialising, so the onus is on us to ensure it continues to be the premier event on the SMSF calendar

“Once again we have a high-powered list of speakers including another plenary session that will have the three regulators (ASIC, the ATO and APRA), as well as the Federal Treasury.

“I know from the feedback I got last year how much delegates got from this session, and I am confident the representatives of these four key government bodies will again deliver some fascinating insights into the SMSF sector and the superannuation industry more broadly.

“We have also managed to entice academic Michael Drew to present on the topic of how behavioural issues and what people want influences decision making in superannuation, and Andrea will address the issue of “The SMSF advantage – For all life stages?”

“She will outline why SMSFs are unique and show how the current system is working well to meet the needs of Australians, highlighting the importance of the emerging SMSF profession to help trustees achieve their retirement goals throughout their life.”

Colley says the conference is not all about hard work. Over the three days there will be several social events as well as networking opportunities this event always affords time for.

Registrations are now open, with Early Bird offers available until 30 November, so make sure you secure your seat. In addition, there is the opportunity for industry professionals to sign up as a SPAA member to take advantage of the pro rata annual membership.

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Mark Rantall

The Financial Planning Association of Australia (FPA) yesterday responded to the report from the Australian Securities & Investment Commission (ASIC) into the life insurance advice industry.

The report refers to over 200 pieces of insurance advice that have been reviewed by ASIC with the report covering lapse rates and advice quality. The report noted product innovation by insurers and age-based premium increases as some of the drivers behind high lapse rates. The report also raised concerns with training and competency for insurance advisers. This further reinforces the need to raise financial adviser education standards as proposed in the FPA’s submission to the Parliamentary Joint Committee (PJC) Inquiry.

Whilst the FPA is not sure that any of its members have been involved in the advice given, the report reinforces the benefits and need for professional standards such as the FPA Code of professional practice. FPA members are bound by a Code of Professional Practice and as a professional association, the FPA is a firm advocate for higher professional and education standards. Irrespective of remuneration models, FPA members are bound by its Code of Conduct and are held accountable to this. Specifically the FPA can point to Rule 4.10 in the Code that states:

The Member must only make a financial planning recommendation to a client requiring the client to dispose of, cancel, or replace one product or service with another where it is consistent with the requirements in Rule 4.7 and appropriate for the client having regard to any cost, benefit, risks or adverse consequence of:

Any FPA member found to breach rule 4.10 will be subject to the FPA disciplinary process. The FPA has a Life Risk Specialistion (LRS^®), however its disciplinary records show negligible complaints, less than one per year since 2009, made against FPA members relating to life insurance advice.

Mr Rantall stated that “The issues of product design, distribution and embedded product commissions should be looked at by the product manufacturing sector as noted in the recommendations of the report.

“The FPA is focused on advice and we will review the ASIC report and suggested recommendation to review training and the proposed checklist. We are happy to work with other professional associations in the advice space to see how the advice process, guidance or education can be improved.”

“Most financial planners do the right thing and act in their clients’ best interest, providing high quality advice to their clients.”

The FPA submits that many of the issues within the life insurance industry relate to product design, regulatory barriers, pricing, data feeds and public confidence in insurance companies.

Mr Rantall concluded by saying: “We all know that as a nation we are grossly under-insured. Australians need to have appropriate advice on their insurance needs and a professionally qualified financial planner can provide that advice. This recent report should not discourage consumers from turning to a professional for advice – but it does again highlight the need for consumers to turn to a trusted, certified financial planner.”

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John Brogden

Industry associations representing advice and life insurance will form a working group to address the issues raised by the ASIC report into life insurance released yesterday.

The Association of Financial Advisers (AFA) and the Financial Services Council (FSC) will jointly convene a working group to specifically address retail life insurance product structures and distribution practices. An independent chair will be appointed to convene the working group and facilitate industry and policy solutions.

John Brogden, CEO of the FSC said: “It is critical that remuneration models in the life insurance industry are sustainable and practical for consumers and the industry.”

“The ASIC report requires a serious response from the industry. We have formed a working group to achieve this,” Mr Brogden said.

“The working group will consult with the regulators and Parliament on its solutions.”

“The financial advice and life insurance sectors will work together to carefully examine the findings and recommendations in the ASIC report and to assess all options to improve market practices and sustainability.”

Mr Brogden said the working group will produce an initial report on its findings within two months and a final report early next year.

“As an industry we will review the ASIC report and provide a considered response.  We note ASIC will take enforcement action,” he said.

“Consumer trust and confidence in financial advice and products is essential to ensure Australians have sufficient life insurance cover.”

“Australians are chronically underinsured. Life insurance helps protect Australians against the social and economic impact of premature death, illness, injury or disability that impacts their ability to earn an income – arguably the most important financial asset a person has.”

“The contribution of private life insurance will be critical for the Australian economy as our population ages and workforce declines.”

Mr Brogden also said: “In recent years, policymakers have treated life insurance in a bipartisan manner.“

“The ASIC report notes: The FOFA reforms did not extend the ban on conflicted remuneration to individual life insurance sales under personal advice. That is, commission payments for life risk insurance products (with the exceptions in paragraphs 42(a)–42(b)) are exempted from the ban on conflicted remuneration.”

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Brad Fox

The Association of Financial Advisers (AFA) has responded to the release of ASIC’s review of retail life insurance advice report (the Report) by supporting the establishment of a cross-industry working group to address the issues identified.

“The release of the Report has been signalled for some time,” said AFA CEO, Brad Fox.  “Given that ASIC’s review of the life insurance industry was focused upon particular risk factors, the Report was expected to highlight examples of poor practices. The AFA has been proactive in seeking the support of other associations and the Financial Services Council to address the findings.”

However, Mr Fox said it is important that the financial advice profession and the broader financial services industry consider the Report in detail and respond in a comprehensive manner.  “This is a key industry report and any report of this nature and magnitude needs to be comprehensively reviewed and analysed,” he said. “We intend to work closely with the Financial Services Council and other associations to establish the working group in order to ensure an industry-wide response.”

The working group will publicly share a broad terms of reference and then report in a reasonable time frame with regard to those terms. “The majority of our members provide life insurance recommendations as a part of their service to clients,” Mr Fox said.

“Therefore, it is vitally important for our members, and for their clients, that we consider all available options at the product, licensee, adviser and consumer levels to address the issues raised in the Report and to ensure that consumers retain their trust in life insurance. It is important to remember that the majority of Australians do not have sufficient life and income protection insurance.”

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Peter Townsend

Until recently SMSFs couldn’t buy wholesale financial products because ASIC had held they were retail investors unless they had at least $10 million of net assets.

ASIC has recently announced that it will loosen the constraints on SMSFs investing in wholesale products and make the test for eligibility easier to meet.

“It is somewhat curious that at the same time as ‘vested interests’ proclaim that SMSFs are investing in dangerous products and should have their activities curtailed (which translates as: only being able to invest with those same vested interests), ASIC is choosing to give SMSFs access to wholesale investments which don’t necessarily have the same suite of protections as there might be for retail investments.

“But that’s exactly what is happening,” said Peter Townsend, Principal, Townsends Business & Corporate Lawyers.

ASIC answered a FAQ way back in 2004 ‘QFS 150’: “When financial services are provided to a trustee of a superannuation fund, are they provided to a retail client?”  ASIC answered ‘yes’.

What is a ‘retail client’? A ‘retail client’ is described in s.761G(1) of the Corporations Act 2001 (Cth) as any person (which includes a company and a person or company acting as a trustee) unless ss.761G(5), (6), (6A) or (7) applies.  These are the exceptions.

What is a ‘wholesale client’? S.761G(4) says that a financial product or a financial service is provided to or acquired by a person as a ‘wholesale client’ if it is not provided to or acquired as a retail client.  In other words the definition of ‘wholesale client’ is couched in the negative ie anyone that is not a retail client.

ASIC previously said that an SMSF can never be a wholesale client.  It took that view on a reading of s.761G(6) which relevantly says:

761G(6) – Superannuation products and RSA products

…..
(b)    if a financial service (other than the provision of a financial product) provided to a person relates to a superannuation product … the service is provided to the person as a retail client; and
(c)    if a financial service (other than the provision of a financial product) provided to a person who is:
(i)    the trustee of a superannuation fund … that has net assets of at least $10 million, or
(ii)    …
relates to a superannuation product … that does not constitute the provision of a financial service to the person as a retail client.

“ASIC adopted the somewhat tortuous view that the phrase “relates to a superannuation product” means every financial service provided to an SMSF because every such service ‘relates to a superannuation product’ ie the SMSF itself.

“Methinks the draftsperson of the legislation meant the phrase ‘relates to a superannuation product’ to refer to the investment being sold not the investor.  Nonetheless that’s been ASIC’s view for the last 10 years and SMSFs could not purchase investments that were not able to be bought by retail clients.

“With the change comes a new test.  The SMSF will now have to comply with the same eligibility tests as everyone else when it comes to deciding whether or not the investor is a wholesale client,” said Mr Townsend.

What are those tests?

EITHER they meet one of the six tests in s.761G(7), namely:

• product price exceeds $500,000
• product/service is used in connection with a business (but not a small business)
• for last 2 years the person has assets of more than $2.5 million (accountant’s certificate)
• for last 2 years the person has income of more than $250,000 (accountant’s certificate)
• person is acting for a trust but themselves meets any of the above tests, or
• person is a professional investor

OR they meet all of the tests in s.761GA, namely:

• their financial adviser is licensed
• he product is not insurance, super or RSA
• the product is not used in connection with a business
• the financial adviser is reasonably satisfied that the client is experienced in these products, and
• the adviser tells the client they are so satisfied and client acknowledges in writing

If the SMSF is not a retail client then the adviser does not have to provide a Financial Services Guide or a Statement of Advice and can offer products that themselves may not require prospectus-type disclosure.

The SMSF should ensure their investment strategy covers such products and that the trustee is not breaching their duty to members by investing in such a product.

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Charmian Holmes

Equity based crowdfunding platforms may look to existing Australian Financial Services Licensees (AFSLs) for a ‘temporary home’ until they can get their own licence or expected regulatory changes become law, according to Charmian Holmes, Solicitor Director at The Fold Legal (The Fold).

Crowdfunding platforms through which the funder receives shares in the funded company currently need an Australian Financial Services (AFS) licence (or authorisation) to deal in securities. Offering other types of interests in a company or units in a trust is also likely to require an AFS licence and possibly a responsible entity and/or registration of a managed investment scheme.

“ASIC views crowdfunding as a financial service if the offer has a financial product purpose and it involves fundraising through a corporate structure and/or other facility that pools investor contributions,” Ms Holmes says. “In other words, if it involves issuing shares in a company or interests in a managed investment scheme, it’s definitely on their radar.”

The recently released CAMAC report proposes to simplify the regulation of crowdfunding, including how promoters and intermediaries are licensed. “The development of a simplified licence for crowdfunding facilities is definitely on the Australian Securities and Investments Commission (ASIC)’s agenda, however it may take some time,” Ms Holmes says. “In the meantime, crowdfunding platforms may need to look to AFS licensees for a temporary home.”

Before agreeing, Ms Holmes urges licensees to be aware of the risks and responsibilities of appointing a crowdfunding platform, including ensuring their authorised representative agreement and management systems address each of the following areas and conducting a thorough risk-based assessment on the following issues:

• Limiting users to those who are legitimate promoters – Non-legitimate offers could damage your reputation as an AFS licensee and attract ASIC scrutiny. Ensure the crowdfunding platform has effective processes for preventing the platform being used by scammers or ‘conmen’.
• Licence authorisations – Check that you have the necessary licence authorisations for the product and client types of crowd funding activities – e.g. retail clients, securities, unregistered or registered managed investment schemes. It’s illegal to provide services that you’re not authorised to provide.
• Legally compliant offer documentation – Investment disclosure documents for small scale offers should be signed off by a reputable and experienced lawyer to ensure compliance with the Corporations Act and correction of potentially false, misleading or deceptive statements.
• Payment collection facilities – The capital raised must either be paid into a section 981B trust account or be collected by a licensed custody service provider.
• Advertising restrictions may apply – Advertising restrictions can apply to small scale offers – for example, certain investor warnings have to be given in advertising or promotional statements if the disclosure document for the offer has to be lodged with ASIC and this hasn’t yet occurred.
• Assess the level of investment advice that can be given – If the platform will provide investment advice, its operator will need to have the required experience and qualifications to provide the advice.
• Remuneration disclosure for retail client offers – Remuneration earned by the platform will need to be disclosed to retail clients in the FSG and elsewhere on the website.
• Cross-border crowdfunding – As overseas offers could be risky and trigger overseas regulation; consider whether to restrict offers to Australian investors.
• Monitoring and supervision – Do you have the capacity to monitor the platform’s  compliance and outsourcing arrangements – you will be as responsible for their financial services activities as you would be if you were providing them.
• Professional indemnity insurance and EDR arrangements – If offers will be made to retail clients, PI insurance and EDR membership is necessary. This may involve additional cost.

“Licensees may also need to seek legal advice on any areas they are not sure about,” Ms Holmes says.

Crowdfunding is an innovative avenue for entrepreneurs to raise capital without going down the path of venture capital or public offer funding, but Australian regulation of crowdfunding is still in its infancy. “It’s taken off overseas, especially in the US where a considerable number of crowdfunding websites provide platforms for investors to fund corporate, creative and philanthropic projects,” Ms Holmes says.

Crowdfunding sites in Australia include venturecrowd, ozfund, pozible, thinkable, thunderfunds, jumpstartz and stagelabel.

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Veronique Ingram

Australian Financial Security Authority’s Chief Executive Veronique Ingram and Commissioner John Price of the Australian Securities and Investments Commission (ASIC) have announced the release of a new Memorandum of Understanding (MOU) between AFSA and ASIC.

ASIC and AFSA are responsible for the oversight of Australia’s insolvency systems for individuals and corporations.

Mr Price said the new memorandum facilitates the capacity for both agencies to work more cooperatively and productively.

‘While ASIC and AFSA have had similar memorandums, the latest agreement acknowledges the benefits obtained from sharing information and resources, while still maintaining proper information and privacy protections at a high level,’ Mr Price said.

Ms Ingram said that the new MOU further extends the liaison, cooperation, assistance and the exchange of information to enhance the effective and efficient performance of the regulatory functions of ASIC and AFSA.

The previous MOU between ASIC and the AFSA was signed in April 2002. The revised MOU has been updated to reflect developments since that time, including:

the Senate Economics References Committee 2010 report on The Regulation, Registration and Remuneration of insolvency Practitioners in Australia: The Case for a New Framework, which led to a range of proposals directed at harmonising and streamlining the personal and corporate insolvency systems, and
administrative and functional changes such as the change of name of Insolvency and Trustee Service Australia to AFSA and assumption by AFSA of responsibility for the Personal Property Securities Register, which incorporates the former ASIC Register of Company Charges.

View the MOU

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