Impact of Legislative Requirements for Financial Planners on Collaborative Practice

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1 Impact of Legislative Requirements for Financial Planners on Collaborative Practice To: Catherine Gale, President Law Council of Australia 8 November 2012 Queries regarding this submission should be directed to: Contact person Katrina Koniuszko Ph (03) kkoniuszko@liv.asn.au Law Institute of Victoria (LIV). No part of this submission may be reproduced for any purpose without the prior permission of the LIV. The LIV makes most of its submissions available on its website at

2 Table of Contents Introduction... 3 The Problem... 3 The Legislative Framework... 3 Australian Financial Service Licence or Holder... 4 Definition of Financial Products... 4 Practical Effect of Legislative Requirements on a Collaborative Process... 5 Types of Advice... 5 a) Financial Planners... 5 b) Lawyers... 8 Page 2

3 Introduction The Law Institute of Victoria is the peak body for the Victorian legal profession. Through its Collaborative Practice Section, the LIV currently represents 321 members. Approximately 50 of these members are also members of Collaborative Professionals Victoria ( CPV ). The Section s members consist of lawyers and other allied professionals including psychologists, counsellors, financial planners, financial advisors, accountants, mediators, coaches and other professionals involved in collaborative practice. The Collaborative Practice Section is overseen by an Executive Committee. This submission has been prepared following extensive consultation with the Executive Committee. The Problem Commonwealth legislation, influenced by consumer protection concerns, thoroughly prescribes who may be a financial planner and precisely how they may do their jobs as financial planners. Financial planners are often used in the process of family law collaborations to help the parties and lawyers understand and make decisions about the division of property between the parties and the payment of maintenance and child support between them. Victorian protocol is that such financial planners may not help either party after the collaboration is concluded in their own financial planning affairs. Hence, they are not involved in buying and selling products as commonly occurs in providing normal financial planning services. Unfortunately, the regulation of planners is so thorough that it appears that merely obtaining mutual and consensual advice from planners during a collaboration may require them to comply with their routine highly cumbersome generic procedural requirements which were not designed with collaborative practice in mind. Accordingly, this may make it impracticable for planners to continue to be involved in collaborations. This would be highly detrimental to efficient collaborative practice. The Legislative Framework Chapter 7 - Financial Services and Markets of the Corporations Act 2001 (Cth) ( the Act ) regulates the provision of financial services in Australia. Section 760A(a) and (b) of the Act respectively promotes confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services and fairness, honesty and professionalism by those who provide financial services. Page 3

4 Australian Financial Service Licence or Holder Section 911A of the Act provides that a person who carries on a financial services business in this jurisdiction must hold an Australian financial services licence covering the provision of the financial services ( Financial Services Licensee ). However, a person is exempt from the requirement to hold an Australian financial services licence for a financial service if the person provides the service as representative of a second person who carries on a financial services business and who holds an Australian financial services licence that covers the provision of the service ( Authorised Representative ): Section 911A(2)(a)(i) of the Act. Definition of Financial Products Section 673A of the Act defines financial products as a facility through which, or through the acquisition of which, a person makes a financial investment, manages financial risk and/ or makes non-cash payments. The Act requires financial professionals (Financial Services Licensees and Authorised Representatives) to provide three key disclosure documents which are to be made available to clients who are seeking financial products: 1. Financial Services Guide Subdivisions A, B and C of Division 2 of Part 7.7 of the Act requires that persons who are to be provided with financial services as a retail client are to be given a Financial Services Guide. The Subdivisions specify who is authorised to provide a Financial Services guide, when the Financial Services Guide is to be provided and the obligatory contents of the Financial Services Guide. 2. Statement of Advice Subdivisions C and D of Division 3 of Part 7.7 of the Act requires that persons be provided with a Statement of Advice. Subdivision D specifies the obligatory contents of the Statement of Advice. 3. Product Disclosure Statement Division 2 of Part 7.9 of the Act requires that persons are to be provided with a Product Disclosure Statement. Subdivision C specifies who must prepare the Product Disclosure Statement and the obligatory contents. Page 4

5 Practical Effect of Legislative Requirements on a Collaborative Process Financial planners, including Financial Services Licensees and Authorised Representatives, are frequently utilised in a collaborative process to assist parties to identify interests and issues, develop options, consider alternatives and make decisions about future actions and outcomes regarding their property and financial matters. The collaborative process often involves financial planners providing advice about various financial products to those parties Types of Advice a) Financial Planners The role of financial planners in a collaborative process generally entails the following: 1. To gather the financial data, information, facts and material necessary for parties to discuss and negotiate a property settlement; 2. To assist clients to generate their own options for their settlement; and 3. To assist the clients in understanding the financial implications, ramifications and consequences of the options being considered. Given the stringent onus on financial planners as espoused in the Act, financial planners must adhere to the legislative requirements when participating in collaborations. In doing so, financial planners must be conscious of what, when, how and why such advice is being provided. A clear distinction must be drawn between the provision of factual information, personal advice, general advice and financial product advice: 1. Financial Product Advice Section 766B of the Act defines Financial Product Advice as a recommendation or statement of opinion, or a report of either of those things, that is intended to influence a person or persons in making a decision in relation to a particular financial product or class of financial products, or an interest in a particular financial product or class of financial products or could reasonably be regarded as being intended to have such an influence. Section 766B(2) of the Act specifies that there are two types of financial product advice: a) Personal Advice Section 766B(3)(a) and (b) define personal advice as financial product advice that is given or directed to a person (including by electronic means) in circumstances where the provider of the advice has Page 5

6 considered one or more of the person's objectives, financial situation and needs or a reasonable person might expect the provider to have considered one or more of those matters. b) General Advice Section 766B(4) defines general advice as financial product advice that is not personal advice. 2. Factual Information The Act does not define factual information with specific reference to financial products. Section 1042A of the Act defines information (noting this is with specific reference to insider trading) as matters of supposition and other matters that are insufficiently definite to warrant being made known to the public and matters relating to the intentions, or likely intentions, of a person. This definition is not exhaustive and leaves much scope for interpretation as to what may amount to information. The LIV appreciates that drawing a clear distinction between the different types of advice may not be an easy task. Financial planners are assisted by the requirements of the disclosure documents. A strict interpretation of the Act requires that financial planners are obliged to comply with the following requirements in a collaborative process: Type of Advice Financial Services Licensee or Authorised Representative? Disclosure Document/s Factual Information No No Financial Product Yes Financial Services Guide, Statement of Advice Advice and Product Disclosure Statement (Section 941A and B of the Act) Personal Advice Yes Financial Services Guide, Statement of Advice and Product Disclosure Statement (Section 944A of the Act) General Advice Yes Statement of Advice and Product Disclosure Statement (Section 941C(4) and 949B of the Act) Page 6

7 Financial Planners are required to provide disclosure documentation notwithstanding that the advice provided is for the duration of the Collaborative Contract only and for the purpose of collaborating with clients in regards to their property settlement. Financial planners may not be retained following the expiration of the Collaborative Contract to provide ongoing services, save for exceptional circumstances. The LIV believes that the stringent onus imposed on financial planners by the Act is contrary to the intention of collaborative law which is to self-empower clients to generate their own options with the assistance and support of collaboratively trained professionals. The specific requirement to provide a written Statement of Advice unduly limits the options to be generated by clients which is the antithesis of a collaborative process. A strict interpretation of the Act is likely to require that multiple written Statement/s of Advice should be provided to clients at various stages of the collaborative process in response to the differing options being generated by clients. The LIV believes that this incurs additional costs to clients participating in the collaborative process and offers no additional benefit in return. It is the experience of our members that the additional costs are estimated to be in the vicinity of $5,000 plus. Such additional costs may deter clients from electing to participate in or proceeding with a collaborative process. The penalty for failure to provide the required disclosure documents is 200 penalty units for individuals and/or 5 years jail and 1,000 penalty units for bodies corporate. In addition to these penalties, administrative remedies may be applied by the Australian Securities and Investment Commission such as suspending or cancelling the Australian Financial Services Licence and a temporary or permanent banning order. Regulation (3)(e) of the Corporations Regulations 2001 (Cth) may ease this onus which lists transfers of financial products between associates (perhaps this may include the parties in the collaboration?) as being exempt from classification as a financial service. The LIV suspects that this Regulation is limited in scope and the advices provided by financial planners may fall outside this exemption. Page 7

8 b) Lawyers Section 766B(5) of the Act states that advice is not financial product advice if it is advice given by a lawyer in his or her professional capacity, about matters of law, legal interpretation or the application of the law to any facts, except as may be prescribed by the regulations, any other advice given by a lawyer in the ordinary course of activities as a lawyer that is reasonably regarded as a necessary part of those activities and except as may be prescribed by the regulations, or advice given by a registered tax agent or BAS agent (within the meaning of the Tax Agent Services Act 2009) that is given in the ordinary course of activities as such an agent and that is reasonably regarded as a necessary part of those activities. Lawyers, therefore, must also be conscious of what, when, how and why such advice is being provided. A clear distinction must be drawn between the provision of financial product advice (if so, lawyers must be a Financial Services Licensee or Authorised Representative) and advice falling within the exemption in Section 766B(5) of the Act. It is evident that the role of financial planners in a collaborative process was not envisioned by the Act. The LIV questions whether strict compliance with the legislative provisions of the Act is required of financial planners and lawyers participating in a collaborative process. The LIV seeks guidance and clarification from the Law Council of Australia in this respect. If strict compliance with the legislative provisions of the Act is required of financial planners and lawyers participating in a collaborative process, a submission may need to be made by the Law Council of Australia to the Attorney General advocating for reform. It may also be appropriate to urgently obtain senior counsel s advice on these matters to confirm, or otherwise, what the position of financial planners is in acting in collaborations. Page 8