Approved product lists and FoFA adviser duties

By Michael Mathieson
Financial Services Funds Risk & Compliance Superannuation

In brief

Written by Senior Regulatory Counsel Michael Mathieson

The FoFA duties that apply to personal advice given to retail clients have been operating for over four years now. ASIC has enjoyed some recent success in the courts in cases brought on the basis of those duties. In this context, it is worth revisiting approved product lists and whether they assist, or impair, compliance with the FoFA duties.

Specifically, does a narrow APL make it harder to satisfy the best interests duty or the conflicts/priority duty?

Best interests duty

A financial adviser is deemed to satisfy their duty to act in the best interests of a retail client in relation to any personal advice given if the adviser takes certain steps. They include conducting 'a reasonable investigation into the financial products that might achieve … the objectives and meet … the needs of the client that would reasonably be considered as relevant to' the advice.

Does a narrow APL prevent an adviser from conducting 'a reasonable investigation' into potentially relevant financial products? According to ASIC, it does not.

In RG 244, ASIC sets out a situation involving personal advice given to a retail client and makes it clear that, in ASIC's view, the adviser complied with their FoFA duties. In ASIC's example, Martin is a member of the ABC Superannuation Fund. He calls the fund's call centre and speaks with a financial adviser. The financial adviser suggests Martin might be interested in a transition-to-retirement (TTR) strategy – this is before the Government decided it no longer liked the strategy so much. The adviser goes on to recommend a TTR strategy and that Martin should implement the strategy by means of an 'ABC TTR Pension Account'. Martin accepts the recommendation and takes out a TTR pension from the ABC fund.

The interesting point is that the adviser is apparently subject to a very narrow APL. The adviser tells Martin:

… if you decide to go ahead with this advice, it's also important to understand that I am only authorised to give advice about ABC Superannuation Fund products and about similar superannuation products generally. I am not able to give advice about any other specific products. However, in giving my advice, I will consider whether the ABC Superannuation Fund products that I recommend can meet your needs and objectives …

It is also clear that the ABC TTR pension is a pretty average product. The adviser tells Martin the product's fees are 'reasonable' and its investment performance is at the lower end of the third quartile (specifically, it is 14th out of 20). Towards the end of the conversation, the adviser says:

… there may be other TTR pension account products or other financial products that could suit you better so you may want to consider or seek advice on them …

It is clear from the example that the adviser does not investigate any financial product other than the ABC TTR pension. And it is clear that ASIC has not forgotten the requirement to conduct a reasonable investigation (if the adviser wishes to rely on the safe-harbour), because the requirement is identified in a marginal note that accompanies the example. It is difficult to avoid the conclusion that, in ASIC's view, it is possible to conduct a reasonable investigation into potentially relevant financial products by limiting your consideration to a single related party product identified in your APL.

If ASIC is right, the requirement to conduct a reasonable investigation is a very narrow requirement.

Conflicts/priority duty

If a financial adviser knows, or reasonably ought to know, that there is a conflict between the interests of the client, on the one hand, and the interests of the adviser's authorising licensee or an associate of their licensee, on the other, the adviser must give priority to the client's interests when giving the advice.

Does a narrow APL prevent an adviser from giving priority to the client's interests? Again, according to ASIC, it does not.

In the example outlined above, the adviser goes on to give Martin a statement of advice. The SOA says, perhaps a little heroically: 'No conflicts of interest arise as a result of the recommendations in this Statement of Advice'. However, the SOA immediately goes on to identify a range of product fees that will apply if the recommendation is implemented, some of which 'will go to ABC Superannuation Trustees'. In this way, the related party product issuer has an interest in the advice given by the adviser.

ASIC appears to consider there is no conflict within the terms of the statutory duty. Alternatively, ASIC considers there is a conflict but considers that the adviser does not fail to give priority to Martin's interests. Again, either way, if ASIC is right the conflicts/priority duty is a narrow duty.


ASIC's example outlined above does not constitute a ruling on, or relief from, the law. However, it reflects ASIC's carefully considered views on the law and suggests, perhaps surprisingly, a narrow view of the FoFA duties.

The EM to the Bill that introduced the duties said:

… the narrower an approved product list constructed by a licensee is, the more likely it is that its [advisers] will not be able to recommend a product from the list. This means it is in the interests of the licensee to construct approved product lists that are suited to their target clients …

This statement is most interesting. It does not say the narrower an APL, the more likely it is an adviser's duties will be breached, it says the narrower an APL, the more likely it is a product will not be able to be recommended. The statement implies, consistent with ASIC's apparent views, that a narrow APL is OK – a narrow APL may increase the chances the adviser will be unable to act but it will not necessarily increase the chances of a breach occurring.

Stepping back from the detail, it is worth remembering that the law does not regulate APLs. It does not require them to be used, or prevent them being used or, where they are used, require them to conform to any particular standards. The idea of regulating APLs was kicked around when FoFA was being put together, but dismissed. More recently, John Trowbridge recommended that APLs for life insurance products be broadened, but no industry standard on the topic has been made.

If ASIC decides to take a less benevolent attitude towards narrow APLs in future, it will be interesting to see whether it attacks them on the basis of the FoFA adviser duties or seeks to do so on some other basis. It seems to me the conflicted remuneration provisions would present very little in the way of opportunity for ASIC in this respect – although why that is so will have to wait for a future instalment of Unravelled.