By Michael Perkins

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Does RG 200 represent another step in a policy campaign?

In focussing on super fund trustees, ASIC's regulatory activities complement the recent ATO focus on SMSF trustee legal and regulatory compliance.

Both activities make it clear that in the operation of superannuation funds, whether SMSF or otherwise, fund trustees are subject to the general law including State Trustee Acts and not just SIS.

RG 200 needs to be understood in the context of the full legal compliance backdrop of trustees. This is no different to client and fund members needing to be understood only in the context of their actual situation.

RG 200 might also be seen by the less charitable of us as an attempt by the Government to establish a safe harbour of limited advice for retail clients. This regime then allows the trustee to step outside the full rigor of Corporations Law compliance for providing personal financial advice. However, as fund balances for these clients mostly are under $100,000, we need to also need to consider whether the clients with these level of balances lie within the normally services client segments of most advisers.

Who does RG 200 affect?

RG200 has two clear dimensions, the first is in explaining the limited advice regime for non SMSF super trustees and the second is to provide general guidance for the delivery of advice to clients of financial advisers.

This guide is not only for super fund trustees, but also their outsourced advice providers and those who provide financial product advice to super fund members about their existing interest in a fund (including insurance).

While the guide sets out how the relief given for s.945A of the Corporations Act 2001 to super fund trustees providing advice to their members, the guide is also more generally applicable to the process of giving advice to super fund members. Its principles are of more general application.

Much of the guide is codified common sense that should already be part of the practice of established financial advisers. However, as super trustees may be new to the client advisory process, this guide provides a primer to the currently recognised foundation advice process and its value for this should be recognised.

What is the objective of RG 200 and the intra fund advice relief?

The purpose of the guide is simply stated at para RG200.7 as "to improve the access of working Australians to advice about their super fund".

For many retail clients this amounts to a proxy for their investable wealth outside their home. For this type of client this new superannuation based regime becomes the default financial advisory relationship.

If the Government is serious about banning or substantially reducing the availability of commissions to financial advisers, RG 200 provides an advisory safety net to the clients of non-SFSF superannuation funds.

At para RG200.23 it is clear ASIC is relying on the limitation of the advice being given to deliver the consumer protection being sought. This position assumes that the members are capable of appropriately evaluating the limitation placed on the advice. In my opinion, integration of the limited advice with knowledge of the overall personal circumstances of the client remains a risk and responsibility for the member, is a limitation that should be made in all advice given to super fund members.

This guide usefully recognises that advice may be given by any appropriate method of communication with a fund member. Trustees must consider whether the methods of communication they choose result in sufficient record of the interaction with the member in order that compliance with the law is evidences in the business records of the trustee.

This guide however must be read subject to the Corporations Act Ch 7 and ASIC's other compliance advice. Unless the intra fund advice relief is complied with strictly, super trustees will remain subject to the full rigor of the Corporations Act 2001.

Revisiting Some Basics

RG 200 at 50-53 challenges us to reflect, in considering the limited advice regime, that we we must also consider the boundary point between mere factual information and advice, whether that advice is limited or not. The guidance we are given is that:

"Advice generally involves a qualitative judgement about, or an evaluation, assessment or comparison ......: see Regulatory Guide 36 Licensing: Financial product advice and dealing (RG 36) at RG 36.18.
Factual information is objectively ascertainable information whose truth or accuracy cannot be reasonably questioned: see RG 36.21.
Where a communication is a recommendation or statement of opinion, or a report of either of those things, that is intended to, or reasonably expected to, influence the member to make a decision ...., it is advice, not factual information¹" .

Risk management processes require us to appropriate contextualize the provision of information or communication between adviser and client. Correspondence, file notes, statements of advice all provide means to evidence the context of how an adviser is interacting with a client at a point of time.

In moving beyond the mere provisions of factual information, it is the interests, needs and objectives of the client that can most usefully used to limit the context of the relationship of the client and the purpose of communication.

In considering what are the interests and needs of the client, we need to also understand or exclude from enquiry what source of complexity in the life of the client is influencing their statement of needs. These can include the following factors²:

1. Business
2. Family interest
3. Family member interest
4. Personal property ownership
5. Family or collective property management

Advice must respond or exclude from responsibility the evaluation of risks generated by factors such as these. Indeed the extent of responsibility of an adviser to assist a client to evaluate issues such as these must itself be qualified at the earliest practical point in an engagement.

What is the Real Nature of the Relief?

Elements of the Conduct Relieved

Trustees must already hold an AFS licence authorising the provision of personal advice about super. The fund must not be an SMSF fund.

The advice provider must be the trustee or an authorised representative of the trustee.

The advice is limited to a member's existing interest in the fund.

The advice provider must inform the member of the limitation of advice at the start of the advisory interaction.

Written advice a complying with the terms of the relief must be given after the advisory interaction.

Points for reflection

How is this different from limited advice under s.945A?

It seems to revolve around being able to accept facts as presented by the client at face value and not embarking on any further know your client checks before delivering advice.

This seems to in turn imply that for any given facts presented by the client it is reasonable for the advice provider to assume that no issues outside the fund or any other matter is relevant to the provision of the limited advice.

A critical risk then being placed back in the client is how they determine the relevant facts that should be communicated to the fund trustee in the first place.

The examples in the guide seem to be fact situations where these distinctions bear little risk. There seems to be a level of factual simplicity of the client where those facts inherently limit the advice being given. No effort seems to have been taken in the guide to indicate these types of simple fact patterns that inherently justify this new limited advice regime.

RG 200.23 makes it clear that members, in receiving the advice have "no misunderstanding about what they are, and are not, being advised on". It is therefore essential that trustees in approaching this new regime have an efficient method of excluding from the scope of these limited interactions, responsibility for facts and circumstances not advised to them.

This still leaves us with the unanswered question; what is the real utility of the limited advice to the client once you consider the impact of the limitations to the appropriateness of the advice for the client?

This relief has no impact on the State Law or Common Law regulating the fiduciary relationship between trustee and member.

Embarking on being an adviser rather than service provider to members brings expanded fiduciary and legal risks to trustees. What is the business case for trustees assuming this risk?

In limiting the advice, what knowledge of the client must you disclaim in order to effectively limit the advice?

Interactions between fund trustees and members needs to be consistent with their fiduciary obligations to members.

Excessive limitations on advice may reduce its usefulness to a point where the utility of the advice is in question and this lack of utility may create prejudice between the interests of members.

Fund trustees must deliver benefits to members that are reasonable and non-discriminatory. Fund trustees must be satisfied that their advice is useful enough to deliver appropriate benefit to members in order that their fiduciary duty is discharged.

What bright line test separates general advice from limited, personal intra fund advice?

The brightest line is between facts and advice - see RG200.63

It is up to you to determine how you want to give factual information and advice. Factors to consider include:

(a) whether you are operating a high-volume business, which might lend itself to factual information or advice over the phone, by email or on the internet; and

(b) the complexity of the factual information or advice you are offering.

For example, factual information or advice on simple topics might be better suited to the phone, email or the internet, while more complex advice might be better suited to a face-to-face meeting.

Trustees and advice providers need to decide where they draw the line in their operations having regard to the staff, skills, processes and infrastructure they maintain as well as the nature of their relationship to members or clients.

Beware the forum shopping client!

Trustees need to be aware of the risks of re-intermediating an existing client/advisor relationship where not all relevant facts may be made available to the trustee.

What makes advice to super fund members, complex?

Compare and contrast the following:

RG200.37

If you are licensed to give general advice, you must warn the member that:

(a) the advice has been prepared without taking into account their objectives, financial situation or needs; and

(b) they should, therefore, consider the appropriateness of the advice, in light of their own objectives, financial situation or needs, before acting on the advice (s949A(2)).

RD200. 40 and RG200.41

If you are a financial product issuer, you do not need an AFS licence or authorisation to give general advice about products you issue: reg 7.1.33H. For example, if you are a super fund trustee, you do not need an AFS licence or authorisation to give members general advice about their existing interest in your fund (including insurance).

RG 200.43 ands RG200.44

In RG 175, we give guidance that advice can be regarded as personal advice if the way it is presented means a reasonable person might expect you to have considered one or more of the member's objectives, financial situation or needs: see RG 175.6.

General advice about a member's existing interest in a fund, given by you, will not be personal advice where you clarify at the outset the type of advice you are giving. It is good practice to ensure that the member understands upfront that they are getting general advice, not personal advice. This will avoid confusion and help the member to understand what information they are getting.

RG200.48

The test for whether you are giving personal advice includes whether you have considered the member's personal circumstances in giving the advice, or whether a reasonable person might have expected you to do so (s766B(3)), not whether you merely possess information about the member's personal circumstances. You will have considered the member's personal circumstances if you have taken them into account.

Old rope for new?

In considering these matters, the following conclusions can be drawn. Do these conclusions really represent new knowledge or just codified common sense?

The relationship between fund trustee and member is being drawn to be analogous with professional adviser and client. This may create legal compliance risks for trustees due to the different operation of common law, State Trustee Acts, Corporations Law and SIS.
Communications with fund members and advisory clients can be made by any technological means appropriate to the relationship, subject only with that means of communication being amenable to the compliance regime of trustee or adviser.
Depending on the simplicity of not of clients affairs, the functional difference between general advice and limited personal advice may not be substantial.
Estate Planning related advice and communications about facts around this subject should, in my opinion, be dealt with uniformly as a complex advice matter outside the class order exemption. Client concerns about the following subjects should be regarded as triggers for estate planning issues:
a. Personal and Family Representation and Succession
b. Family Continuity, Governance and Legacy
c. Wealth Preservation, Enhancement and Transfer
d. Business Ownership and Control
e. Financial Security and Compliance
Responding to a need or objective nominated by a client will normally elevate a communication interaction from factual information provision or general advice to personal advice.
Once you are considering a member or client's personal circumstances as a context for providing facts or general advice the suitability or not of that information for the client needs to be handled by either enquiry or engagement limitation that complies with the class order.

Is the devil you know better than the devil you do not know as far as compliance regimes are concerned?

In my view, the intra fund advice regime is only useful if it creates appropriate benefits for members. I remain concerned that advice limitations may render the utility of extremely limited advice in all but the simplest of circumstances. Evaluation of this risk always involves facts outside the operation of the fund as they are part of the background situation of the member.

If you always have to consider factors outside the fund in order to qualify advice as simple then that fact will always render advice complex by the standards in para RG200.6.

What legal and fiduciary risks does RG 200 pose to super fund trustees?

The scale of the risk depends on what the member expects

Whilst s.62 of SIS³ is prescriptive of the sole and ancillary purpose of a superannuation fund, it is silent on the manner in which the purposes are achieved.

With non-SMSF superannuation funds, there is substantial variety in how these purposes are fulfilled.

Client appropriateness of fund benefits and the variety of approaches between funds provides challenges in normalising the provision of a particular type of benefit to a particular type of member even within the same fund.

In moving from factual or general advice to limited or unconditional personal advice, trustees need to reflect on whether they can discharge their common law duties to members in anything other than a service provider / trustee/beneficiary relationship.

Advice obligations to fund members may in many situations be an unnecessary and risky complexity to the fund trustee.
Nonetheless, it is reasonable for members to have cost effective, timely and valuable advice about the interest in a superannuation fund.

What is uncertain is whether the fund trustee is best placed to advise a member as this may conflict with the fiduciary and trust obligations that exist between trustee and member.

What business is the fund trustee conducting?

Superannuation trustees need to evaluate whether the risk of non-compliance with the intra fund advice relief in their operations is warranted given the broader sanctions to which the trustee would then be subject.

RG200.8 sets out that provision of factual information and advice to a member outside the class order relief requires trustees to consider:

"(a) regulatory requirements under the Corporations Act, including those in Ch 7 about licensing, disclosure obligations and the requirements to:

      (i) provide services efficiently, honestly and fairly;
      (ii) ensure adequate representative training;
      (iii) manage conflicts of interest; and
      (iv) maintain dispute resolution systems;

(b) regulatory requirements under Div 2 of Part 7.10 of the Corporations Act and the Australian Securities and Investments Commission Act 2001, which prohibit misleading or deceptive conduct;

(d) common law obligations such as the duty of care;

(e) contractual obligations; and

(f) compliance with relevant industry standards. "

Irrespective of the class order relief being granted by ASIC, trustees will be subject to items c, d, e and f in this list in their operation as trustees. In New South Wales this includes compliance with the Trustee Act NSW 1925 that states at s.14B⁴ :

"Any rules and principles of law or equity that impose a duty on a trustee exercising a power of investment continue to apply except to the extent that they are inconsistent with this or any other Act or the instrument (if any) creating the trust.
Without limiting the generality of subsection (1), a duty imposed by any rules and principles of law or equity includes the following:
(a) a duty to exercise the powers of a trustee in the best interests of all present and future beneficiaries of the trust,
(b) a duty to invest trust funds in investments that are not speculative or hazardous,
(c) a duty to act impartially towards beneficiaries and between different classes of beneficiaries,
(d) a duty to take advice.
Any rules and principles of law or equity that relate to a provision in an instrument creating a trust that purports to exempt, limit the liability of, or indemnify a trustee in respect of a breach of trust, continue to apply.
If a trustee is under a duty to take advice, the reasonable costs of obtaining the advice are payable out of trust funds.

Trustees must assess their response to RG200 from the perspective of already being subject to fiduciary obligations to their members as a result of their function as trustees. Clause 14B (2) (a) raises some interesting challenges for trustees of large superannuation funds. In moving into provision of personal advice to members or sections of members and not just trustee services under its deed, is the trustee prejudicing the interests of other members of the fund?

Depending on the circumstances of the fund and the scale and type of advice activities undertaken, it is possible that large scale personal advice provision to only sections of a fund's membership could result in a breach of general trustee duties by the super fund trustee.

RG 200 recognizes that complex personal advice about super includes:

1. Super switching
2. Consolidation
3. Retirement planning
4. Insurance outside a members fund
5. How to allocate funds available for investment among super and other types of financial products

At para RG200.6, the complexity of advice is indicated by it involving issues "outside of a member's fund". Complexifying factors outside the fund that can impact a member's interests in the fund include:

Family risks - to whom am I accountable and how to I make sure only the people I want benefit from my super in the event of my death?

Claim Risk - how do I evaluate the strength of the fund to resist estate claim risk and exposure to the Superannuation Complaints Tribunal?

Beneficiary nominations - how do I evaluate the usefulness of varying beneficiary nomination terms across public offer, SMSF and other funds?

How do I evaluate the effect of a reversionary pension to act in lieu of a beneficiary nomination as an option for benefit succession planning?

In not recognizing factors such as these RG 200 leaves unanswered whether matters such as these is inside or outside the intra fund advice regime given that benefit succession is a primary purpose of the fund under SIS which provides at s.62 in part:

" (i) the provision of benefits for each member of the fund on or after the termination of the member's employment with an employer who had, or any of whose associates had, at any time, contributed to the fund in relation to the member;

(ii) the provision of benefits for each member of the fund on or after the member's cessation of work, if the work was for gain or reward in any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged and the cessation is on account of ill health (whether physical or mental);

(iii) the provision of benefits in respect of each member of the fund on or after the member's death, if:
(a) the death occurred after the member's retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged (whether the member's retirement occurred before, or occurred after, the member joined the fund); and
(b) the benefits are provided to the member's legal personal representative, to any or all of the member's dependants, or to both;

(iv) the provision of benefits in respect of each member of the fund on or after the member's death, if:
(a) the death occurred after the member attained the age prescribed for the purposes of subparagraph (a)(ii); and
(b) the benefits are provided to the member's legal personal representative, to any or all of the member's dependants, or to both;

(v) the provision of such other benefits as the Regulator approves in writing."

Reviewing investment profiling processes

As advisers reconsider what impact the current focus on professionalism and client first attitudes have on their advisory practices, it is necessary revisit how the adviser handles the provision of general and personal financial advice and how the change in status of relationship is handled in the course of a client engagement. RG 200 provides important guidance on this matter.

The case of reconsidering how you re-present investor and portfolio information to your clients provides a worthwhile example of the issues that such work can present.

I think the idea of adequate identification of the client's risks to which the adviser needs to respond in financial planning needs to be expanded.

RG200 states that:

If you are considering providing factual information and advice to a member, you may also need to consider:

(a) regulatory requirements under the Corporations Act, including those in Ch 7 about licensing, disclosure obligations and the requirements to:

(b) regulatory requirements under Div 2 of Part 7.10 of the Corporations Act and the Australian Securities and Investments Commission Act 2001, which prohibit misleading or deceptive conduct;

(d) common law obligations such as the duty of care;

(e) contractual obligations; and

(f) compliance with relevant industry standards.

It is important to establish the context in which investment profile information is to be used and what other information may be needed to set an appropriate context for its use.

Considering the context of using the investment profiles, if it is provided to all clients as general information then the s.942A warnings about general advice need to be given. If in the normal course of your business you will not be qualified to use the RG 200 limited advice regime, compliance with s.945 will be needed in the use of the investment profile information to provide anything other than general advice.

If the investment strategy is to match or fulfil the interests or objectives of the client, then the linkages between the investment strategy and the outcomes sought by the client need to be built.

In the Estplan estate planning professional competency definitions we identify the following factors that can contribute to a client's risk profile:

1. Personal and Family Representation and Succession
2. Family Continuity, Governance and Legacy
3. Wealth Preservation, Enhancement and Transfer
4. Business Ownership and Control
5. Financial Security and Compliance

My view is that ss soon as you start considering these matters in an engagement, you have moved to the provision of personal advice.

These factors all contribute to the financial risk tolerance of the client. I do not think Finametrica and similar tools is sufficiently oriented to client objectives and risk areas such as these.

RG200.12 - 13 reminds us that:

To give suitable advice, you must:

(a) know your client-determine the relevant personal circumstances in relation to giving the advice and make reasonable inquiries about those personal circumstances;

(b) know your product-having regard to information you obtain from the member about their personal circumstances, consider and conduct investigation of the subject matter of the advice as is reasonable in all of the circumstances; and

(c) ensure your advice is appropriate to the member, having regard to your consideration and investigation of the subject matter of the advice (s945A(1)).

With the renewed focus on client centred professional advice processes, I think advisers need to consider what advice processes need to be built in front of the investment profile information in order to assure that appropriate advisory outcomes for clients are delivered by the use of the investment profile information.

RG200 at 14-16 further expands on this discussion of the suitability rule by stating:

The requirement that personal advice must be suitable is scalable according to the nature of the advice. This means that you can limit your inquiries to the agreed subject matter of the advice. Where the subject matter of the advice is relatively simple, less extensive member inquiries are required to reflect the level of complexity, and the advice can be presented simply.

The level of inquiry and analysis you are required to undertake to ensure your advice is suitable will vary from situation to situation and will depend on the advice you are giving. You need only obtain and analyse sufficient information to provide the advice requested or proffered.

Extensive consideration and investigation of matters outside the subject matter of the advice is often not required to give personal advice to members about their existing interest in a fund. For example, comprehensive analysis of the member's full financial position is often not necessary to give personal advice to members about their existing interest in a fund.

s.949A(2) of the Corporations Act 2001 reinforces the fact that investment advice must be related to and qualified by the client's objectives and needs when providing general advice. The following quote from RG 200 37-37 illustrates this:

As a general rule, if you are giving general advice, you must hold an AFS licence with an authorisation to give general advice, or be the authorised representative of such a licensee.

If you are licensed to give general advice, you must warn the member that:

(a) the advice has been prepared without taking into account their objectives, financial situation or needs; and

(b) they should, therefore, consider the appropriateness of the advice, in light of their own objectives, financial situation or needs, before acting on the advice (s949A(2)).

Having regard to the "client first" attitude we are being drawn to promote, I think that the time has arrived where the interests, needs and objectives of the client must be considered as the primary limiters of advice. Engagement processes and advisory processes and documents needs to reflect these limitations with appropriate qualification of the relevant scope of the client and adviser's responsibility.

Conclusions

The value of RG200 in clarifying the process of giving appropriate client advice through a range of means of communication should not be underestimated.

Lack of clarity about how a super fund's essential purposes under SIS relates to the complex /simple advice distinctions in this new regime remains an unanswered matter at the moment. This remains a concern for fund trustees and client advisers alike.

The examples under RG 200 give some limited guidance about the kind of member or client interactions that may be appropriate for the class order regime for trustee advice.

Fund trustees need to consider whether it is in their business model and permitted by their trust deed to be more than a trustee for members.

The delivery of appropriate benefits to members is both a trust law and SIS obligation on trustees. This obligation must not be confused with the operation of a fund trustee in becoming an advisor of its members. This extension of function may need direct support by the trust deed for the fund.

Where clients have a combination of SMSF and non- SMSF superannuation, they now have another choice to source financial advice. A consumer risk is that it is the client's perception of the simplicity of their affairs that may lead to a "cost cutting" approach to sourcing financial advice. Advisers need to be alert to the risks to their client relationships by clients sourcing advice from the lowest cost advisor irrespective of its appropriateness.

Advisors need to assess the relevance of this risk for them and ensure they act to entrench their value proposition with their clients.

Communication flexibility, appropriate advice delivery, the value of advice delivered and the cost effectiveness of advice delivered are issues for financial and estate advisors generally and should be explored separately to the intra fund advice regime.

Adherence to the current s.945A regime by independent advisers of clients should yield the best client outcome, subject to that advice being cost effective for the client.

END.

¹Edited for emphasis by author.
²Following Habberson et al cited at T.G. Habbershon et al. / Journal of Business Venturing 18 (2003) 451-465

³See http://www.austlii.edu.au/au/legis/cth/consol_act/sia1993473/s62.html

⁴ http://www.austlii.edu.au/au/legis/nsw/consol_act/ta1925122/s14b.html

RG 200 – delivering simplified advice for superannuation?